Should the home affect Age Pension eligibility?

-- | 11/11/2019

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Glenn Freeman: In this edition of "Ask the Expert," I'm speaking with Graham Hand from Firstlinks.

Now, Graham, firstly, many of our viewers here will recognise you from Firstlinks, which has just recently become part of the Morningstar fold. I think we're into three weeks now.

Graham Hand: Yeah.

Freeman: So, firstly, how is it going in the time you've been here with us so far?

Hand: Yeah, it's been great, Glenn. Everyone is really welcoming. And I like this opportunity to expand the sort of services that we offer to our readers, the whole range of things that we were finding it difficult to find time to do that at Firstlinks, but also expand our audience reach into the Morningstar readers as well.

Freeman: Yeah. And I just want to take the opportunity today to ask you about – so, one of the poll questions because you regularly run polls on Firstlinks – and you were asking your readers what they thought about this long-running discussion that's been out there about whether the family home should be included in the Age Pension assets test. And you've had some – for a relatively low key poll, you've had quite a number of responses and some really interesting comments on the site.

Hand: Yeah, it was very interesting. And it's obviously a very controversial subject. We had something like 700 responses. So, a good sample. And the issue here is that a lot of people feel there's inequity that someone could have, say, a $2 million family home and only have maybe $0.5 million of other assets. So, they got $2.5 million of total assets. They would be entitled to almost a full age pension. And that comes with other benefits such as cheaper pharmaceuticals and medicines and access to the pension loan scheme. Whereas another person might have a family home worth, say, $1 million. But because they've got $1.5 million outside of the family home, they're not entitled to any pension at all nor any of those medical benefits, yet they have the same assets. So, you can imagine that it's a very sort of controversial subject depending on which side of that fence you're on.

Freeman: Is it on the policy agenda now that specific question?

Hand: Look, governments consider this a no-go zone because a lot of people who own their family home and sometimes very valuable, not always but sometimes very valuable, are cash poor. So, they rely on the fact that they get an age pension even though they might be in a multimillion-dollar house. So, you can see that literally that's the sort of a really difficult one. So, even with the new retirement incomes review that's been organized, Josh Frydenberg, the Treasurer, specifically taken this off the table. So, I'd say, at the moment, it's not on the policy agenda because of the political difficulty.

Freeman: Taking a bit of a step back, speaking about the retirement income review more broadly, what can people expect from this retirement income review and what should they not expect? Because we've obviously seen some watering down of that by Treasurer Frydenberg in recent weeks.

Hand: Yes, the government has tried to make it clear that this is a fact-based rather than a recommendation-based design review. And they're hoping that the review will come with a range of ways to think about retirement income and superannuation that the industry will largely accept and help to take the debate forward.

So, what might they can consider? One of the big issues in superannuation is, should we go from the current 9.5% superannuation guarantee up to what is currently legislated up to 12%. But of course, governments could change whether that happens. So, there's two divides on that. On the one hand, people say, if you look at the way Australia is changing, you go back 30, 40 years, we used to have seven workers for every retired person. So, that was tax revenue to pay for pensions and health. If you go forward to where the intergenerational report goes to in 2045, they expect only 2.7 workers for every retired person. So, the question is, where's the money coming from?

And so, the people who argue for the 12% into super, are really saying, well, people have to become far more self-sufficient. So, you need incentives around the superannuation system to encourage people to save for their retirement. The people who say we should stay at, say, 9.5% argue that you're actually forcing people, often people who can't afford it, to forego current consumption for future consumption. And even to the extent, say, people maybe not be able to afford a house by the time they're 30 or 35, because they've got money in super. And you can sort of see this sort of sympathy on both sides.

Freeman: Yeah. And certainly, in the current environment, that's something we're seeing where the government is trying, pulling all sorts of levers trying to get consumption to pick up and yes, increasing the SG in a time like this, for instance, would seem to be quite counterintuitive.

Hand: Yeah. And there's a lot of argument about if money goes into superannuation, does that come out of people's wages or is it in addition to? But if you think about what a good retirement means, if you own your own house in retirement, even if you're on the pension – and I'm not suggesting this is at all a way for someone to sort of plan their life. I'm talking about, whether you could sort of do okay – then the full age pension for a couple per week is about $720. Now, if you don't own your own house, you're seriously struggling on that. If you own your own house, you can sort of probably do okay, not saying you shouldn't aspire to that.

So, you could say that owning your own house is a very important part of retirement planning. So, allow people to do that by allowing them to have money earlier in their life, versus this argument about putting more into superannuation. So, it's a sort of fact base that the government hopes the retirement income review will add some dimension to. I mean, age pension is an interesting thing that people – if you actually think about it, it's a sort of government guaranteed index-linked perpetual annuity. It's actually a pretty good fallback position, but you certainly would want to top it up by owning your own house or having other savings. So that's one possibility.

I think that the other thing the review might look at is, there's still a lot of confusion in the industry over whether an asset should be a growth asset or a defensive asset and I'd like a bit more work done on that.

Freeman: Assets that are held inside superannuation?

Hand: Yeah. Because what you end up with, it makes it very difficult to compare superannuation funds and there's a big focus on how well are the superannuation funds going. But when they say it's in a balanced fund with 70% growth, but then in each of the industry, each of the retail or industry funds or funds generally put different assets into what they consider defense. There's no rules.

Freeman: Yeah, what is a growth asset and what's not.

Hand: Exactly. So, sometimes what looks like a fund doing really well, they just happen to have got more sort of growth type asset sometimes in what other people call defensive. And if the market has been going well, they look like they're outperforming. But it's in many ways, the way they've been categorizing the investment. It's actually more aggressive than it looks like when they say they are defensive. So, that's sort of fact-based thing. But we shouldn't expect any recommendations. This is not like say a Royal Commission where they'll have witnesses and interrogation. It won't be anything like that.

This report appeared on 2022 Morningstar Australasia Pty Limited

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