Last week’s analysis of the treatment of non-homeowners revealed just how little attention successive governments have to the changing circumstances of retirees.
In a period of rising house prices and rents, leaving the maximum level of rental assistance at $120 a fortnight or $3120 a year and setting the additional asset test exemption for non-homeowners at only $146,500 has disadvantaged many retirees.
The latest blow is the lack of attention on the continued application of the income and assets tests designed in a period when investment returns and levels of home ownership were much higher. Both major parties have now confirmed their intention to continue to make the full age pension plus benefits available to homeowners without limits as to value, and only reduce their benefits if they own other assets or receive other income.
This raises the question of why virtually the same assets and income test applies to both homeowners and non-homeowners. Why, one reader asked, should there be any reduction in the pension of non-homeowners until they receive sufficient income to pay a realistic level of rent?
That certainly would be a major improvement and assist existing renters as well as other pensioners who choose or are forced to sell their home. Now that the maximum deeming rate is set at an investment return of 3.25 per cent, the 50 per cent income test leaves pensioners with a return of only 1.6 per cent on amounts above a small exempt level of income.
After the $3120 rental assistance allowance, this means that about $500,000 of financial assets is required to generate sufficient income to pay a modest rental expense of $200 a week. Changing both the income test and assets tests for non homeowners for example by exempting the first $500,000 of financial assets from both the assets and income test would reduce but not totally remove the current bias in favour of homeowners.
With house prices rising steadily and the costs of borrowing at historically low levels, reverse mortgages are an increasingly attractive investment option for retirees.
Compared with selling a house and losing all or a large part of pension entitlement, a reverse mortgage can yield higher returns than alternative investments. Retaining the home costs less than renting even after allowing for the expenses involved. It also grants access to the maximum annual age pension entitlement of just over $22,000 (single) and $33,000 (couple combined).
Draw downs on reverse mortgages have no impact on these entitlements. Even paying a capitalised 6 per cent mortgage interest rate, annual house price appreciation is likely to more than compensate for the interest costs involved. The biggest benefit is being able to avoid the penalties currently inflicted on non-homeowners by the current asset and income tests.