While it is too early to judge if COVID has brought forward the number of seniors retiring in Australia, what is known is that retirees face years of low interest rates with the RBA Governor stating several times that interest rates won’t rise until 2024.
Paul Rogan, Founder, Pension Boost, thinks that pre-retirees and the retired are caught between a rock and a hard place with COVID uncertainty and the effects of a sustained period of low interest rates.
“A recent study by Forbes Advisor highlights to this uncertainty about retirement trends in the US. More than double the number of Baby Boomers brought forward their retirement plans due to COVID in 2020.
“An interesting point in the study was that more Americans want to age in place and not downsize. This is a consistent trend in Australia and has led to more interest in reverse mortgages to supplement cashflow impacted by low return markets,” said Paul Rogan.
“Another risk facing pre-retirees and those early in their retirement is that globally stock markets are at or near record highs and a correction is likely on the horizon. A market downturn early in retirement can materially adversely impact the time over which the nest egg will last. The Forbes Advisor report noted increasing interest in the use of reverse mortgages to mitigate this risk by tapping the equity in your home to support cashflows rather than having to sell growth assets in volatile markets,” he said.
Paul asked financial planner John Hazell from Richmond Partners in North Sydney for his views on seniors’ thinking about reverse mortgages.
John stated that more of his clients are considering the Australian Government’s reverse mortgage option known as the Pension Loans Scheme (PLS), because of its advantages which include:
- Retirees often have significant equity locked up in their home, with no easy way to release it. Commercial reverse mortgages have higher interest rates, costs and complexity, whilst conventional bank loans and lines of credit are increasingly difficult for retirees to obtain and retain.
- The PLS provides a simple equity release mechanism without the stress of having to see multiple professionals (solicitor, financial planner) and expenses. Plus, whilst there’s no obligation to make repayments, it offers the flexibility of being able to be repaid in full or in part at any time without fees or penalties, which suits those with windfalls or other inheritances later in life.
- The PLS provides individuals and families with ways to keep mum and/or dad in the family home longer, potentially offering peace of mind by accessing additional in-home care services and delaying an often-unwanted entry into residential aged care facility.
- The PLS assists family members to avoid the significant transactional costs involved in downsizing (e.g. stamp duty, agent’s commissions, styling, legals, etc) eroding the level of equity release, not to mention the emotional upheaval involved.
- As noted in the Forbes Advisor report, the PLS can help to delay the erosion of other assets, which may have a higher performance profile than the underlying cost of the PLS, can help to avoid CGT triggered from the sale of those assets, e.g. investment property.
- Low interest rates mean that clients can offset the lower rate and ‘cheaper money’ (currently 4.5% p.a.) with the ability to maintain their market linked portfolio in a balanced profile with an assumed compounding average return at 7-8% p.a. (IOOF MultiMix Balanced Growth Trust 9.45% p.a. average over 5 years to 28th September 2021, sector at 7.95% p.a. for same period). If it is also in a tax-free income stream or allocated pension, that return is not eroded by tax. The advent of new legislation opening up superannuation to retirees up to 75 years old without a work test from 1 July 2022, means that previously taxed investments and in some cases near zero interest rate term deposits could now be moved into a tax-free income stream for a better longer term return profile with the confidence the PLS can be used for capital expenses and, if so desired to supplement a better lifestyle and increased lifestyle expenditure.
- The long-term growth profile of Sydney residential property means many of our clients are sitting on a significant asset in the family home. They are also confident of the continued long-term growth of their property and reluctant to downsize. They can access this growth with relatively modest accumulation of debt, which historically would be outpaced by the compounding growth they may receive in their property’s value over the next 5, 10 or 20 years.
- We have had some clients who could not even afford to do maintenance on their property and were considering selling it to pay for medical costs or other capital expenditure. They are eligible to draw on the PLS to fund the medical costs, capex and/or draw a bit more to live on.
What is the Pension Loans Scheme?
The PLS has been in operation in various forms since 1985 and it is one of the Australian Government’s best kept secrets. The intent of the PLS is to assist seniors fund their regular costs of living by accessing some of the equity they have in their home or property.
From 1 July 2019, all Australian resident seniors who own property can access the PLS, including self-funded retirees.
The PLS is a ‘reverse mortgage’ style contract where the Australian Government provides you with a loan amount each fortnight – at a maximum payment level of 150% of the Full Age Pension less any government pension you currently receive.
A ‘reverse mortgage’ simply means you are not required to make any repayments during the term of the loan, although you certainly can if you wish to, and have the funds to do so.
More information: Which retirees can access the Government Pension Loans Scheme?
Paul Rogan
Founder and CEO
Pension Boost
Sydney
M: (+61) 0423 780 113
Email: paul@pensionboost.com.au
https://pensionboost.com.au
John Hazell
Principal Partner
Richmond partners
M: 0416 194 619
Email: jhazell@richmondpartners.com.au
https://richmondpartners.com.au