Friday, 20 November, felt a bit like Christmas Day - just a month early.
Since July, Australians had been waiting for the release of the government’s Retirement Income Review, in the hope that it might lead to some policy presents for their retirement sack.
And now, the review's release day was finally here.
So did Australian retirees and pre-retirees end up with a lump of coal or a bounty of goodies under the pre-Christmas tree?
Below are five key takeouts from the review.
Importance of home ownership in retirement has been elevated and defined
The review report makes it clear that home ownership is a critical, but somewhat unrecognised, component in retirement security.
This will put pressure on the government to deliver solutions to get people into home ownership during or before their 50s and therefore reverse the trend towards people renting, rather than owning, in retirement.
“The home is the most important component of voluntary savings and is an important factor influencing retirement outcomes and how people feel about retirement,” the report says.
“Home owners have lower housing costs and an asset that can be drawn on in retirement. If the decline in home ownership among younger people is sustained into retirement, there will be an increasing number of retirees who rent.”
While the home is important, retirees are not effectively using the equity in their home to fund retirement
The report finds that the home’s role in retirement is not being fully utilised. This will again put pressure on the Australian Government to deliver policy outcomes to help Austrailans more easily access home equity.
“Few retirees use the equity in their home to support their standard of living in retirement. The options available to do so include reverse mortgages, equity release schemes, home equity loans and downsizing. Reverse mortgages are the main product available, but usage is low,” the report finds.
“Selling or downsizing the family home in retirement to convert home equity into financial assets can reduce a retiree’s age pension payment due to the assets test,” the report says. “This can deter retirees who may want to move to more suitable accommodation and/or release equity from their home to increase their income.”
“Retirees also face significant transaction costs to right-size, such as moving costs and stamp duty.”
This finding reflects the results of a survey conducted by LJ Hooker and Downsizing.com.au in 2017, which found that changing the pension assets test to exclude all or part of the proceeds from sale of the family home would be the one incentive nominated by 27 per cent of potential downsizers to help them downsize.
The above analysis again puts pressure on the Australian Government to examine the role of the pension assets test, and potentially allow downsizing or reverse mortgage payments to be exempt from this test. Currently, couples who own a home start losing pension payments when they hold more than $401,000 in assets, and lose the pension altogether when they hold more than $876,500.
Another argument is that the assets test should be scrapped altogether and replaced with a standard, universal pension available to all.
It also puts pressure on State Governments to change stamp duty systems - something New South Wales and Australian Capital Territory governments are already undertaking.
There’s a need for education to help retirees understand their options
The report makes it clear that Australians are making a series of assumptions about home equity releases that may not be in their best interests.
It finds that many Australians:
- Want to use their home equity to fund future expenses such as aged care services
- View mortgage equity products as inherently risky and do not understand the nature of Government programs such as the Pension Loans Scheme
- Wish to ‘age in place’ and/or can’t find suitable downsizing options
- Want to pass on their principal residence to heirs
The review report finds education has a key role to play to deal with these and other retirement system issues.
“The retirement income system is complex,” the report says. “There is a need to improve understanding of the system.”
“Complexity, misconceptions and low financial literacy have resulted in people not adequately planning for their retirement or making the most of their assets when in retirement.
“Adding to complexity is the interaction with other systems, such as the aged care and the tax systems. People need better information, guidance and good, affordable advice tailored to their needs.”
The situation facing renters is a problem…but answers are thin on the ground
The review report makes it clear that Australia’s retirement system is not serving the increasing number of people entering retirement as renters.
The number of Australians who are private renters and aged over 55 is expected to increase from 647,584 people in 2016 to 1.110m in 2031 - a startling jump of 72 per cent. Over the same period, there will only be a modest 13 per cent increase in over 55 homeowners.
“The retirement income system does not appear to be delivering an appropriate standard of living for many retiree renters,” the report says.
“Owning a home has a positive influence on a person’s standard of living in retirement. Whereas, in retirement, renters have higher levels of financial stress. A significant proportion of retiree households that rent are in income poverty, which is even higher for single retiree renters.”
Concerningly, the report doesn’t have any clear solutions for elderly renters, given it is arguably too late in life for many of these to transition to home ownership or build sufficient savings. It comes to the conclusion that even a whopping 40 per cent increase in Commonwealth Rent Assistance payments are unlikely to make a significant difference to this situation.
Fortunately, the marketplace is now responding with some innovative and secure housing solutions for elderly renters.
Nothing has changed...for now
Given that the report had been with the Australian Treasurer since July, it was expected that the Australian Government would release an official action plan alongside its release. In fact, it did nothing of the sort and only promised to “consider” the findings.
This means that, for all the media commentary and talk created by the report’s release, there is not a single firm government proposal from it on the table.
If the government decides to progress any policy options from the report, it is expected they would undergo a further round of consultation.
FIND OUT MORE:
- Retirement Income Review
- Josh Frydenberg media release
- Pension assets test
- LJ Hooker and Downsizing.com.au 2017 report on downsizing barriers