How to maximise your retirement income

National Seniors supporter, Vic from New South Wales, has written to us about the impact rising house values is having on his retirement plans.

Vic is a part pensioner. Aside from his part pension, his major income source is the rent he receives from an investment property. Like many property investors, Vic has seen the value of that property dramatically increase in value over the past 18 months or so. While this is good news, Vic is worried about the impact this has on his actual income.

Because the pension in Australia is means tested, the more you have (in assets and income) the less you get in pension. Those tests are the Income Test and the Assets Test.

Vic’s concern is that the value of his asset, his rental property, is appreciating faster than assets test limits are being indexed, resulting in a situation where his asset and income are out of whack.

Vic says “… this is a blatant unjustified and unfair reduction to the Age Pension…. without a corresponding adjustment to the assets limits test.”

For someone like Vic, he is facing a decline in his real income of $150 a week, which he says cannot simply be recouped by lifting his tenant’s rent by the same amount. Clearly, this dramatic rise in property values will force landlords like Vic to put up rent prices or take a cut in their income.

Like many others, Vic wonders where he can make up the difference. While Vic wants the government to adjust the assets test to better reflect the boom in property values, is there anything he can do himself to ameliorate his loss of income beyond simply raising rents?

Of course, Vic could sell his property in the hope of investing in higher yielding investment options. But, and it’s a big but, Vic would need to think very carefully about whether he could achieve a better return in an alternative investment vehicle like shares and superannuation.

A problem for Vic, is he wouldn’t be able to put this money into superannuation, without significant taxes and he would also have to pay capital gains tax at his individual income tax rate (unless the property was acquired before 20 September 1985).

The only other option is to buy shares or other investments directly or put money into a low-yielding term deposit account, both of which come with their own risks and rewards, upsides and downsides.

Another interesting option is to use the government’s Home Equity Access Scheme.

Before 1 January 2022, the scheme was called the Pension Loans Scheme. The name change better reflects the fact that you don’t have to be a pensioner to get it.

Simply, this scheme allows you to borrow money from the government to supplement your retirement income using property.

The scheme lets older Australians get a non-taxable fortnightly payment using Australian real estate as security for the loan. To help you decide whether to apply for the loan payment, you can use these calculators:

• Loan eligibility calculator
• Loan estimator

You can choose the amount of loan payment you get each fortnight (but can also be paid as six-monthly lump sum).

Ultimately, you must repay the following to the government:

• Some legal costs
• The loan amount
• Accrued interest

You can repay some or all of the loan, at any time, but you must pay back the loan if your property is sold (at any time or through the winding up of your estate).

From 1 January 2022, the annual interest rate dropped to 3.95% (after strong campaigning from National Seniors). This rate compounds each fortnight on the outstanding loan balance. The longer you take to repay the loan, the more interest will accumulate.

Someone like Vic could choose to take out a loan for $7,800 a year ($150 per week) for 10 years and then sell his property. At this point he would be required to pay back the loan and interest costs.

There are costs to start and exit the loan. The amount you need to pay depends on your circumstances.

The government works out the costs based on how many and the type of properties you use as security for the loan. For example, if you use one property as security for your loan, you’ll have one set of costs. If you use two properties as security, you’ll have two sets of costs – one for each property.

You can make repayments at any time, but you don’t have to. You can instead wait and pay it in full when you sell the property. But remember, the longer you have the loan, the more interest you’ll need to pay. You can also stop your loan payments at any time.

If you are considering accessing the Home Equity Access Scheme, we suggest you first take a look at the Centrelink website and arrange to discuss your circumstances with a Centrelink Financial Information Officer or seek independent legal or financial advice.

National Seniors is advocating to replace the current pension system, with its complicated means tests, with a universal pension.

This would eliminate the sort of issues that Vic, and so many other pensioners are experiencing, including being forced to cut the hours of work in order to comply with the Income Test.

A universal pension does away with means testing. Every older person of a certain age would be eligible for the full pension.

Retirees would earn as much as they like from their investments or from work but still get a pension. They would simply pay tax to fund their entitlement, making the system economically sustainable.

This would give all retirees access to a year-on-year safety net.

The federal government would be required to enact tax reform, to ensure those with adequate income paid back the pension when they didn’t need it.

So, rather than create an up-front barrier to the pension through means testing, government would instead recoup the cost of a universal pension through the tax system. This would also eliminate the current duplication of bureaucracy within Centrelink and the ATO.

Source: Services Australia