The government has made it clear that retirees are expected to use the equity in their homes if it becomes necessary to increase their spending.
There are two main ways to do this and neither is without challenges.
The first is to downsize, which can be costly and possibly lead to a substantial reduction in old-age pension – the second is to take out a reverse mortgage.
The advantages of reverse mortgages are that you can stay in your home, avoid the costs of changing ownership and maintain your old age pension, if applicable. However, this means that you are stuck with increasing debt over the years.
But there may be additional pitfalls that so far have not been made public.
A mortgage broker recently told me about the case of a 78-year-old single woman with a home worth $1.8 million who was receiving a full pension – her only assessable assets were an old car, furniture and $5,000 in the bank.
One of his two children had lost his job and was struggling to pay off his $300,000 home loan.
She was looking to take out a $320,000 reverse mortgage that would pay off her daughter’s home loan and also give her $20,000 for essential expenses for her own home.
She thought it would be better to transfer the money to her daughter now, rather than have her wait until she died, which could be 20 years or more from now.
Centrelink allows giving up to $10,000 per year or $30,000 for 5 years, and any amount over these thresholds becomes assessable.
The problem with this lady’s situation is that, of the proposed donation of $300,000, $290,000 would create an asset that would be treated by Centrelink as a private asset and held for five years. Since the cut-off point for a single retiree who wishes to receive the full pension is $270,500, this would result in a slight drop in their pension.
A better strategy for pension purposes would be to borrow $220,000, which would allow him to give his daughter $200,000 and still have money available to improve his own home. If the $200,000 were held by the girl in a clearing account, accrued interest would be significantly reduced and money could be withdrawn each month for loan repayment.
Yes, she could have given $240,000, which would still be below the threshold for a single retiree, but it’s important to consider that today’s presumptive rates will almost certainly increase over the next five years, which could mean a loss of pension for her. subject to income.
This scenario highlights what a minefield the field of Centrelink and reverse mortgages is and why expert advice should be taken before major changes are considered. It would also be important for her to revise her will to take into account the gift made to one child and not to the other.
Noel answers your money questions
I am single, over 75 and totally confused. If one downsizes the family home while receiving a partial pension from Centrelink, does that mean losing the pension? Do you have to pay capital gains tax when selling the family home? Your expert advice would be highly appreciated.
If the family home is held in your personal name, it is an exempt capital gains tax asset. The family home is not taken into account in the income or asset test, but money held in the bank is taken into account.
If we assume you are a single owner with $320,000 in assets, your fortnightly pension should be around $819. If you reduced and released an additional $250,000 in cash, your taxable assets could rise to $570,000 and your pension would fall to around $69 per fortnight.
If you have money left over from the downsizing of your home that brought your total assets to over $593,000, you would lose the pension altogether. That’s why it’s important to take advice and do your homework if you’re retired and considering downsizing.
We are considering selling a property and are compiling a list of expenses over the 20 years since the premises were purchased and built.
Can we claim expenses for the maintenance of the property? If so, what constitutes maintenance? Can I claim gardening expenses like mowing the lawn? We have never rented the property.
What about electricity, gas and water prices?
Julia Hartman of BanTacs advises that under Section 110-25(4), the following items may be added to cost base: interest on money you borrowed to acquire the asset, maintenance, repair or insurance, rates and property tax, interest on money you borrowed to refinance or acquire the asset; and interest on any money borrowed to finance capital expenditures incurred to increase the value of the assets.
Maintenance may include items such as: cleaning products, lawn mowing or mower fuel and light bulbs. It would seem that electricity, gas and water prices are not included. Readers should note that section 110-25(4) only applies if the property was purchased after August 1991 and the expenses listed above cannot be used to increase a capital loss, only to reduce a capital gain.
Thanks to various takeovers, I now own stocks listed on the US stock exchange. Over the years I have reinvested all dividends and listed them with ATO. Recently the company made an offer for Odd Lot Sales which I accepted. Consequently, I received a check for $4,000 in US currency. I was unable to exchange this check into Australian currency, although I tried several banks and made extensive phone/email communications. My bank (Westpac) no longer processes foreign checks, others require you to have been a customer of theirs for at least six months. The check clearly states that it is only valid for six months.
Is there another way to convert this check to my account? When I finally sell the remaining shares held in this company, the problem will only get worse.
A Westpac spokesperson said that in 2020, Westpac advised customers that it would stop processing foreign currency checks effective May 31, 2021. This change was made in response to changing demand from customers. customers, migrating to digital payment methods and reducing in-person payment requests. Customers with an ongoing need to receive foreign currency funds should instead request payments by international wire transfer, directly to their Westpac account.
I have referred your situation to the Bank of Queensland where I am banking. My manager there is proactive because he owns his branch and is more likely to listen to customer needs. He tells me that if you open an account with his branch, he could process the check for you. It will need to be sent as an invoice to cash, which means you will have to wait for the product until the check clears.
- Noel Whittaker is the author of Retirement Made Simple and many other personal finance books. Its advice is general in nature and readers should consult their own professional advice before making financial decisions. Email: email@example.com