There Are More Rewarding Options Available to Take Advantage of Your Assets

by Dominique Schuh

WE keep hearing about debt and what needs to be cut. Recently retirement options have again been under the microscope. The sustainability of the age pension is questioned. The ability to continue superannuation tax breaks is questioned. And with rocketing home prices in some parts of the country, there's talk of the family home being subject to pension means testing.
For some of the very house rich/cash poor pensioners and their families, this last suggestion has triggered some consternation. There's the potential loss of the pension for the home owner and the assumed loss of inheritance for 'concerned' family members. Yet the frothing only highlights the lack of financial literacy and strange addiction to a small pension and its associated benefits. Especially strange when for many of these people there are significantly more rewarding options available.

Here is a fantastic case study to illustrate this situation from The Australian: Juliet, a company executive, and her barrister husband John have led upright and financially successful lives. Their combined net assets are now about $6 million - not too far above the average for Mosman but still more than 10 times the national average. Juliet's 75-year-old mother, Nancy, lives a few streets away in Juliet's childhood home, an Edwardian four- bedder, on a large block worth an estimated $4.5m. In the past year alone its value jumped by at least $500,000 thanks to cuts in official interest rates by the Reserve Bank. We further learn that Nancy is down to her last $200,000 in cash and is now claiming the age pension. Along with associated benefits, it's worth $22,200 a year to her. Juliet even thought it was ridiculous her mother was on the pension given her assets, but if that was changed her mother may have to take out a reverse mortgage and she'd likely lose a significant amount of her inheritance.

Strangely, there's no consideration of any other option. Let's even forget the assumption the home could be means tested, it just seems illogical for Nancy to stay in the house whatever the rules. Mosman is one of Sydney's pricier suburbs, yet real estate listings show Nancy could downgrade to a $2 million home and remain in Mosman near her family. Or if she wanted, there's a significant choice of units in Mosman under the $1 million dollar mark. There's even the option of renting, but we'll stay conservative and keep Nancy as a homeowner.

But what about Nancy's pension? Yes, assuming a downgrade to a $2 million house, leaving her with liquid assets of $2.5 million, Nancy would no longer be eligible for the pension. She'd need to pay $96k for stamp duty and assume another $90k in agent fees (assuming 2% on the sale), leaving her with $14,000 from her spare $200,000. However, she now has $2.5 million free that could be invested very conservatively to potentially yield 4% per annum.
The return to Nancy in distributions would be $100,000pa before tax. Assuming the basic (and unlikely) scenario of no franking credits, Nancy is left with a $73,000 yearly income opposed to $22,200 of age pension.
You could be certain any further pension related discounts wouldn't add up to covering that $50,000 income difference. You could also be certain any Edwardian home on a large block in Sydney isn't without ongoing maintenance costs, further eroding that age pension.

Asset rich millionaires and their families bristling at the thought of the family home being pension means tested are upset at the wrong issue. They really need to question why they're clinging to a small government pension when there's a much higher paying alternative. For some, a liquid portfolio could provide a better standard of living and less of a cash crunch down the line if their home became a costly maintenance burden.