Making ends meet in retirement is no easy feat, but support is available and pensioners can take simple steps to boost their income.
New legislative moves have made borrowing from the government against your house more attractive under what is now called the Home Equity Access Scheme.
Formerly known as the Pension Loan Scheme, the program used to have an interest rate of 4.5 per cent but now charges 3.95 per cent.
Association of Independent Retirees president Wayne Strandquist said the new rate was more in line with the market.
“If you were wanting to buy a house you could get interest rates in the 2 and 3 per cent range, so the change brings it closer to the market rates,” he said.
The scheme allows home owners to receive fortnightly payments of up to 150 per cent of the age pension rate as a loan from the government against the free equity in a home.
That figure includes any pension payments that the borrower may be receiving.
To access the scheme, at least one member of a couple needs to be of age pension age and be eligible to receive at least a part age pension. You can still access the scheme even if you don’t actually receive a qualifying pension.
Another change due to start from July 1 allows the loan to be drawn down in one or two lump sums throughout the year.
The maximum annual payment a couple can get under the scheme is $56,884 (full pension plus 50 per cent) while singles can get a maximum of $37,925.
If taken as a lump sum, “that could be enough to get people out of trouble if they need to replace their car or buy whitegoods,” Mr Strandquist said.
The loan is repaid when the house is sold or from the estate if the home owner dies with the debt.
As the chart above shows, the scheme offers a considerable advantage over a commercial home equity loan.
“The scheme allows people with assets who are living frugally in retirement to draw down some equity and have a better quality retirement,” Mr Strandquist said.
Home contents and other possessions
Another thing to wrap your head around is the pension assets test, which affects how much pensioners receive from the government.
Declaring your assets correctly could be the difference between a comfortable retirement and one wracked with financial anxiety.
The pension assets test doesn’t just cover investment assets; it also includes household goods, cars, boats, caravans and the like.
And when it comes to ensuring the right amounts are declared, much of the responsibility falls on your shoulders.
When you sign up for the pension, you will be asked to declare any financial assets you own, such as shares and bonds.
You don’t need to worry about listed investments, as the tax man keeps an eye on those, gives them their market value initially, and adjusts your pension if their values change and they trigger the assets test.
But when it comes to other assets, it’s up to you to value them when you sign up for the pension. And people often make simple mistakes.
“When you buy something new, it might cost you $2000,” said Rob Goudie, principal of Consortium Private Wealth.
“If you get rid of it in a garage sale, then you might get $200 for it.”
So, declare your assets at the value they might be worth if you were to sell them out on the nature strip rather than their replacement cost.
You might pay $35,000 for a new car and take money out of your savings to cover the cost.
Initially that is not a change to your asset base, as one matches the other.
But as the car depreciates, your asset base falls. So remember to declare its depreciation to Centrelink every year.
Mortgaged assets and the pension
If you receive a full or part pension, own a money-producing investment asset, and use your home as security, you could face a problem.
“If you have a debt against your residence it doesn’t offset the value of other assessable assets,” Mr Goudie said.
That means that if you buy an investment asset using your home as security, then its full value is added to your assessable assets and you may lose some or all of your pension.
If you use the asset you buy as security, then the value of it is reduced by the size of the loan and it will affect your pension entitlements less.
Helping out the kids
You can’t give away all your money and access higher pension payments by reducing your assets.
Centrelink has gifting rules that allow you to give away $10,000 a year and no more than $30,000 over five years.
As financial adviser Craig Sankey has explained elsewhere on these pages:
“If gifts of assets exceed $10,000 in a financial year, or $30,000 over any rolling five-financial-year period, the excess gifts are an assessable asset and subject to deeming for five years from the date each gift was made.
“If your age pension age is 67, and you gifted away funds prior to age 62, then this will have no impact on your age pension as the gifts were made outside the five-year period.
“If, on the other hand, you gifted funds at age 65, then any amount above $10,000 would be counted until age 70.
“But it would only affect you between the ages of 67 and 70, as before age 67 you would be ineligible for the age pension.”
It’s also worth noting that if you lend money to a child and put your name on the title of a property that they buy, then that home equity will be included in your asset base.
Also, just because you can get by on your assets after you make a gift, that may change when you can no longer live independently.
“You might need what’s known as a RAD, a refundable deposit, when you or your partner go into aged care,” Mr Goudie said.
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