Assets test change – is your house the answer?

30 Oct

On 1 January 2017, the assets test used to determine entitlement to income support benefits, including the age pension, will change. The questions are, will this impact you? And would or should you do anything?

Presently, a single homeowner can have assets of $783,500 and a couple can have $1,163,000, before they lose their pension entitlement. However, from 1 January 2017, changes to the “taper rate” will mean that a single homeowner pensioner will lose their pension entitlement when their assessable assets exceed $547,000. The upper threshold for a homeowner couple before they lose their pension will be $823,000.

You will note I have referred to assessable assets. Some assets are excluded from the assets test – most notably a person’s primary place of residence.

With the very real fear of a loss of all or part of the age pension from 1 January 2017, many pensioners are looking for ways to minimize their assessable assets.

Earlier this month an article in a national financial magazine spoke about a range of strategies people could adopt to “save” their age pension. One focused on upgrading the family home. This involved taking money that was invested elsewhere and simply reinvesting it in the family home. Whether this was achieved by renovating an existing home or perhaps purchasing a more expensive, up-market home, the outcome is the same. Money is moved from being assessed under the assets test, to being excluded.

But, before rushing out and commissioning a new kitchen, updated bathroom and re-landscaped backyard, or even selling the current family home and buy a more expensive one, let’s just stop and take a deep breath.

In many cases, a more expensive, larger home will cost more to run in terms of heating and cooling, maintenance and upkeep, rates and body corporate fees. There are also costs associated with buying and selling a new home, which include agent’s commissions, legal fees and transfer duties.

In fact, when doing the calculations, the upgraded home may cost more to run on an annual basis than the amount of pension lost as a result of the January 2017 changes. And by spending more on the principal home, money that was previously available for other purposes such as travel, purchasing a new car, replacing white goods, or meeting medical costs, is now illiquid. As they say, if all your money is tied up in your home, and the need for cash arises, you can’t sell the back verandah.

Of course, if additional funds are required, a homeowner could consider accessing additional capital through a mortgage release arrangement such as a reverse mortgage. But that is a topic for another time.

The lesson for today is, even though the changes to the assets test will result in some people receiving a reduced age pension, or losing it all together, strategies designed to reduce assets to preserve the age pension should be considered holistically. A single strategy, on its own, such as upgrading the family home, may result in a pensioner being in a worse position a year or so down the track than if they left existing financial arrangements in place.

That said, if you wish to improve your home, or even upgrade to a new place, then by all means do so. But don’t let the changes to the assets test be the sole determining factor.

Report by Peter Kelly – Centrepoint Alliance

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