Rising life expectancies mean that many Australians can expect to live past 90. This is going to present unique challenges for those who will be trying to move to more suitable housing without losing their prized aged pension in the process.
The recent Budget included a pilot program, the aim of which is to help seniors make the transition from a large home to a smaller home, retirement village or granny flat.
The government will introduce special savings accounts into which pensioners can make a one off deposit of up to $200,000 from the proceeds of the sale of their family home.
The money placed in the account will earn interest, and be exempt from Centrelink means testing for up to ten years.
At a quick glance, it all seems straightforward, but as usual the devil is in the detail.
For starters, the family home must have been owned for at least 25 years, and the account will lose the Centrelink exemption the moment a single withdrawal is made from it. Also the interest on the account must be left in the account to compound – it cannot be withdrawn.
Furthermore, the strategy cannot be used if the person is in a state of health that requires them to move to an aged care facility.
After ten years the money must be withdrawn.
As I have said repeatedly, every investment decision involves advantages and disadvantages, and there is certainly a range of factors to be considered here.
One of the most significant is that downsizing the home and placing the money in an account where it is effectively frozen means that you are moving a substantial chunk of your assets from the residential property basket to cash.
How would you feel if there was a substantial gain in the value of the house you sold, while inflation was eroding the value of the money you were holding in the exempt bank account? And, if you found yourself in a position where you needed to start drawing on the account, you would immediately lose the exemption.
Or a situation could arise where the house you sold did not increase in value, but for the ten years or so that your money was frozen in the exempt bank account, the stock market had a great run and averaged 10 per cent per annum. Obviously you would have been far better off to ignore the special bank account and have a big chunk of your money in shares. There are other issues if you are considering moving to a retirement village. Most deals with retirement villages involve an entry fee, ongoing fees, and a deferred management fee that is deducted from the entry fee when you vacate. It’s often possible to negotiate these fees down in exchange for a higher entry fee. It would be critical to go through all the calculations before a decision was made to lock up a large part of your capital in an account where the money was inaccessible.
Yes, in some cases there could be advantages. If you were a single homeowner depositing $200,000 in the special bank account, you would effectively double your Centrelink asset threshold from $192,500 to $392,500. This would enable people assessed under the assets test to receive an extra $300 a fortnight, or $7800 a year. This would be an effective return of 3.9 per cent per annum on the $200,000 invested.
The pilot is due to commence on 1 July 2014 and conclude on 1 July 2017 and is expected to cost around $112 million. More details will be available when the draft legislation is released.
There has been some concern about the changes to the unclaimed money rules whereby money is transferred to the government if untouched for three years. The proposed accounts will be exempt from the unclaimed money rules but it is also important to understand that unclaimed monies are not lost, they are simply transferred to the government and for the first time will earn interest.
“At a quick glance, it all seems straightforward, but as usual the devil is in the detail.”