There has been much discussion in the media about including the family home in the pension assets test. Regardless of the merits or otherwise of this proposal, it raises a fundamental question- what do the newly pension-deprived retirees live on? Mostly, the answer seems to involve either the sale of the family home- “downsizing”; or some form of reverse mortgage. Both of these options have problems. Many older people simply do not want to move, and reverse mortgages necessarily involve a compounding interest problem.
The Super Group has proposed an alternative approach: allow retirees to “contribute” their family home to super. In effect, this would mean “swapping” the home for an equivalent dollar value balance in an APRA regulated superannuation fund, coupled with a right of life tenancy, if they require it. The earnings on their new diversified superannuation balance would fund a fixed rental payment and provide additional income, which could be supplemented by a drawing on the capital component, if required, down to an actuarially determined minimum balance. On death, the residual balance would be paid to dependents as per any super balance.
In other words, instead of gaining a pool of money on which interest is payable, they gain a pool of money on which interest is earned.
Under this scheme, retirees can access their home equity without the trap of compounding interest; they benefit from diversification of their asset base; they retain the right of abode; and their house is maintained by its new institutional owner. People will quickly come to understand that being a secure tenant is not really different to being an owner, as people in Germany and other Northern European countries demonstrate. All of this would be underpinned by the existing, robust regulatory supervision of APRA.
This proposal also provides a means of addressing longevity risk issues for self-funded retirees- they would be more willing to spend their superannuation balance knowing they have a straightforward means to unitise the value of their home, through superannuation, late in life.
The option would be simply enabled by relaxing contribution limits and age restrictions for this one-off transfer. It would provide a fair and efficient alternative to downsizing or reverse mortgages for retirees seeking to access the equity tied up in their homes. This is essential if the Government tightens the asset test for pensions; and it is worthy of further consideration even if they do not.
You can read more about The Super Group’s proposal by downloading our more detailed discussion paper, Contributing the Family Home To Super.