Retirement and housing (homeownership)

Notably, recent Grattan Institute research^ projects homeownership rates in over-65s will fall to 74% in 2026, 70% by 2036, 64% by 2046, and 57% by 2056. This projection has been based on a number of prevalent issues, for example, the rising home deposit hurdle faced by first homebuyers and greater mortgage burden risks.

With the above in mind, it’s important to note that Australia’s retirement income system is based on three pillars: a means-tested social security entitlement (the Age Pension); compulsory super (Super Guarantee); and voluntary savings, including housing (homeownership).

According to the Government’s recent Retirement Income Review final report*, housing is a key component of voluntary savings, as well as a key factor influencing retirement outcomes and how we feel about retirement.

The report highlights several important points regarding housing, for example:

• ‘Those who enter retirement with owner-occupied housing typically enjoy higher effective living standards by avoiding rental costs (including protection against rent increases). In addition, owner-occupied housing acts as a store of capital security while being mostly exempt from the tax and transfer system.
• The treatment of housing in the Age Pension assets test provides more support to homeowners compared to renters. The larger free areas in the assets test for renters benefits only a small proportion—and even this small proportion are still at a disadvantage relative to homeowners.
• Homeownership serves as a source of emotional security and safety. In addition, homeowners have the opportunity to access the equity in their home to supplement retirement income and manage longevity risk’.

In light of the above, we provide information on retirement with a focus on housing (homeownership) from a retirement income, taxation, and aged care perspective.

Retirement income

When it comes to maintaining your financial wellbeing in retirement, it’s important to understand that as you enter this phase of your financial lifecycle, a certain shift in financial (income-related) resources often occurs.

Namely, a shift largely from employment income, to income derived from a combination of your retirement savings (super and non-super investments), and any potential social security entitlements (eg Age Pension).

Age Pension entitlements

In the 2019-20 financial year^#, 2.56 million older Australians (aged 65+) received the Age Pension. And, of these, 66.9% received the full-rate pension, and 32.8% received a part-rate pension based on their income and assets.

As these figures suggest, the Age Pension remains a vital source of income for many older Australians in retirement—ensuring older Australians can meet a minimum standard of living in their retirement years.

The Age Pension is means-tested (eg an income test and an assets test). Though, from a housing perspective, it’s important to note that a retiree’s principal place of residence is exempt from the Age Pension assets test.

Additional retirement income

For one reason or another, you may find yourself entering, or ending up in retirement ‘asset-rich, but income-poor’—with most of your wealth tied up in your home (an asset that doesn’t typically generate income).

This situation may be further exacerbated when other assets (eg retirement savings and household possessions) are unable to generate the income required to self-fund your desired retirement lifestyle. In addition, you may also find that these other assets work against you with regard to receiving the Age Pension, in part or in full.

Somewhat related to this situation, the Government’s Retirement Income Review highlighted some options to boost your retirement income (and outcome)—one of which was accessing the equity in your home.

Pension loans scheme

The Pension Loans Scheme (PLS) is the Government’s version of a reverse mortgage offering you the opportunity, if eligible, to receive an income stream to supplement your existing retirement income.

In brief, the PLS is a voluntary non-taxable loan secured against your property. Under the PLS, if you or your partner are age or service pension age and you receive a qualifying pension (eg Age Pension), you can nominate to receive (for a designated time period) a fortnightly loan payment of up to 150% of the maximum rate of your pension, minus any pension payment you receive.

Please note: A 2021-22 Federal Budget announced measure, if legislated, will allow PLS participants to access up to two lump-sum advances in any 12-month period, up to a total value of 50% of the maximum annual rate of the Age Pension. As it stands, the measure has a commencement date of 1 July 2022.

Downsizer contribution

In retirement, you may find your home no longer meets your needs. You may prefer something smaller or more aligned with your current (or desired) lifestyle. As mentioned above, you may wish to also boost your existing retirement income sources by tax-effectively investing a portion of the equity in your home.

Since 1 July 2018, those aged 65 or over are able to use the proceeds from the sale of their home, to make a non-tax-deductible downsizer contribution of up to $300,000 each (up to $600,000 per couple) into super.

Of note, and while we all have individual personal circumstances, between 1 July 2018 and 17 January 2020*, more than 9,000 people made downsizer contributions—with an average contribution of $230,000.

Please note: A 2021-22 Federal Budget announced measure, if legislated, will lower the eligibility age from 65 to 60 years of age. As it stands, the measure has a commencement date of 1 July 2022.

Taxation system

Capital Gains Tax (CGT)

As you make your way through the financial lifecycle, you may find yourself disposing of an asset from time to time. When this occurs, you may also make a capital gain or loss.

Whether you make a capital gain or loss can depend on what it cost you to acquire the asset, and what you receive (or are entitled to receive) when you dispose of it. Importantly, if you do make a capital gain, tax is generally payable as part of your income tax, referred to as capital gains tax (CGT).

From a housing perspective, however, your principal place of residence is generally exempt from CGT. In retirement, this can be especially beneficial when considering downsizing, and utilisation of, for example, the abovementioned downsizer contribution to boost your retirement savings.

Aged care

As you progress through your retirement years, you will most likely experience three retirement chapters.

These chapters help highlight the link between ageing and your health status. As you age in retirement, your health often progressively declines. This decline can affect your time, work, finances, housing and care needs.

From a housing and care needs perspective, it’s important to note and keep in mind:

• The early chapter (from age 60 approx.):
  • Housing: You may find yourself comfortable living in your existing home, and therefore, continue residing there. You may undertake renovations, or wish to upgrade and purchase a new home.
  • Care: You may find yourself self-sufficient in terms of your daily living and care needs.
• The middle chapter (from age 65 approx.):
  • Housing: You may find it increasingly hard to maintain your home, and a growing need for age-appropriate layout/facilities. Possibly resulting in downsizing or undertaking home modifications*.
  • Care: You may find your mind and body start to slow down. So, it’s possible you may find a growing need for assistance with daily living, including low-to-moderate levels of home care.

*For example, installation of minor safety aids, such as support rails in your home, as well as internal and external ramps.

• The early chapter (from age 75 approx.):
  • Housing: You may find a growing need for more complex medical intervention, which could result in you moving into a residential aged care facility.
  • Care: You may find your mind and body has declined significantly. So, there’s a growing need for specialised care—moderate-to-high levels of home care or moving into residential care.

*Australian Government, Treasury. (2020). Retirement Income Review: Final report, July 2020.

^Grattan Institute. (2018). Money in retirement.

#Australian Government, Australian Institute of Health and Welfare. (2019). Income support payments for older people.

If you have any questions regarding this article, please contact us.