Aged Pension Cuts for Seniors Will Boost Need for Reverse Mortgages

by Darren Moffatt on April 17, 2014

  • Sumo

Lots of ominous sounds coming out of Canberra recently for seniors.

Firstly, the treasurer has been dropping big hints that the retirement age will probably rise to 7o years in the May budget. While it won’t affect this generation of retirees, take it as done. The retirement age will go up Generation X and young baby-boomers have every reason to feel depressed about the future of their retirement.

However many current seniors should be very concerned too. There are alarming by the media reports emerging from Canberra that the Federal Government has plans to index or cut pension entitlements in the coming May budget.

Shortly I will detail below what I think this policy will look like and how it will work, but I think we can safely say that aged pension cuts for seniors will boost need for reverse mortgages.

2. How new aged pension indexation might work

The main issue facing the government is that 80 percent of all Australian seniors draw either a full or aged pension, yet many have assets of over $1 million in addition to the family home. In a fiscal environment where government finances are stretched, it’s hard not to agree that there is some scope for indexation in these cases. I think it highly likely that the government will move to reduce the amount of other assets retirees can have before they qualify for a pension.

The government may well go further than this. Some have argued that it is not fair for homeowners with properties worth $1.5 – 2 million to claim a full aged pension. The argument is that if your home is worth more than a million dollars – and there are thousands of seniors in Sydney & Melbourne who fall into this category – then they should use some of that equity to pay fund their retirement.

2. Who are these changes most likely to affect?

Part-pensioners, I’m afraid to say you look to be in the firing line. I think you can expect that while in many cases you will still receive some part pension, new indexation will reduce the amount payable.

Homeowners with multi-million dollar values: expect to start paying your own way in the future.

I think it’s likely that the government will make the family home an assessable asset for the aged pension where values exceed say, double the median value. They may well arrive at a similar result with a different formula, but using 2 x median value as an example would mean that Sydney pensioners with a home value of $1.3 million would then see a reduction in their pension, perhaps tapered as the value of the increased to $2 million and beyond.

There are plenty of home owners out there with a house worth $2million who are getting the pension. Should tax payers foot this bill when these people have so much property wealth? I would say NO, as long as there are viable options for these people to access some that equity without being forced to sell the home.

3. What does all this mean?

Well, if this comes to pass it will probably spark more property sales and downsizing as home owners seek to release the equity. This could increase the supply of property and may have some minor negative impact on home values across the market.

It would also mean the day may finally have arrived where the government will actively promote home equity release as a solution that property-rich retirees need to consider.  I don’t think it is any coincidence that more reverse mortgage lenders are now preparing to enter the market.

I’m sure the reverse mortgage industry will welcome these developments. But I’m equally sure many senior Australians will be angry with the government if such policy changes are not phased in gradually and implemented fairly.

The May budget promises to be very interesting indeed. Leave a comment and tell us what you think!

Darren

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