Home / Retirement / Home equity neglected in retirement income strategies: Actuaries Institute

Such is the psychological hold that the family home has on many retirees, it prevents them from accessing the equity in this asset that could contribute to a far more economically secure retirement.

There is a pressing need to educate retirees about accessing home equity to improve their retirement outcomes – especially for those who have insufficient superannuation and other savings or investments to fund their living expenses.

That’s the conclusion actuary Andrew Boal draws in a paper for the Actuaries Institute, titled More than just a roof: Changing the narrative on the role of the home, where he argues that the role of the home in helping to fund retirement is under-appreciated.

“We need to change the narrative so that it is more acceptable to access and spend part of the equity that has been built up in the home. Much of this will come down to how we engage the community in discussions about superannuation and wealth, as well as the role of the home, when planning for what could be 25 to 30 years or even longer in retirement.

“This will involve changing the nest-egg mentality to one in which retirees are encouraged to gradually drawdown and spend their superannuation savings and, where appropriate, some or all of their other financial assets such as the home.”

Boal contends that changing this nest-egg mentality needs to be considered just as much as the structural factors inhibiting the use of the family home as another pillar in a retirement income strategy.

“Part of the value of the home is the certainty it provides in having a roof over your head. There can also be a strong emotional attachment to the family home, local community and family networks that have been established over many years living in the same home and area.

“At the same time, there is also the financial security the home provides in relation to things like the uncertainty associated with funding any future health and/or aged care needs. As a result, there has historically been a natural aversion to having debt in retirement that may reduce the financial security provided by the home,” he says.

When the desire of many retirees to pass on their debt-free home to the next generations is factored in, it helps explain why Boal says this asset is considered untouchable by many retirees.

Currently there are three main types of schemes, each with different terms and conditions, risks and considerations, to access equity in the home.

• Government initiatives such as the downsizer super contributions scheme and the home equity access scheme.

• Privately provided reverse mortgages. These operate similarly to the Government’s home equity access scheme but with different terms and conditions.

• Privately provided equity products. These operate with the person receiving an amount of money from the provider in return for guaranteeing the provider an equity stake in their home, to be paid at the time of sale or as otherwise agreed.

But these options are often not widely understood, with reverse mortgages, in particular, having had a chequered history since introduced by Advance Bank in the early 1990s. Where they are understood there are structural issues that inhibit their use, with Boal highlighting three.

Firstly, there is considerable red tape and transactional effort required selling and buying a house. On top of that, there are significant frictional costs, such as stamp duty and legal and moving costs, discouraging people in or approaching retirement from downsizing.

“In addition, there might not be suitable alternative homes available in their neighbourhood or at a suitable price point to downsize. This creates a difficult choice of having to move to an unfamiliar area with less access to the community where they are established,” he says.

Secondly, Boal suggests relaxing the age pension means testing rules for at least a portion of the value released from a protected asset such as a family home.

“Today, many retirees live more frugally than they need to by not downsizing, with the Government then paying a higher age pension amount than otherwise,” Boal continues. “It is effectively a stalemate, with the by-product being that a certain amount of desirable housing stock is locked away from families and instead used by single or couple retirees.”

“Such an approach would encourage (not discourage) greater access to home equity for spending in retirement, as it removes the disincentive for many people in or approaching retirement who would otherwise lose a significant part of their age pension due to the increase in their assessable assets.”

His third point is for the means test exemption to also be maintained on amounts that are accessed through a home equity release scheme.

“Further, any equity released from property should be eligible as a downsizer contribution, enabling a broader range of approaches to compete on a level playing field and allowing superannuation funds to play a more active role in this segment.”