Ask the Expert: Tempted to dip into your home equity in retirement? Read this first

Question 1

Are there any catches or traps with the Home Equity Access Scheme?

It looks like we’d be eligible. We are living at Age Pension level, though not receiving it, and watch as our super slowly diminishes.

A bit more income would be useful.

The Home Equity Access Scheme can be useful for eligible older Australians who want to supplement their retirement income using some of the equity in Australian real estate.

Importantly, you don’t need to be receiving the Age Pension to use the scheme, you only need to be Age Pension age.

Eligible self-funded retirees can also participate, with the government providing a non-taxable loan secured against Australian property.

Payments can be taken fortnightly, as an advance payment, or as a combination of both.

The main thing to understand is that it is a loan, not a government benefit.

The current interest rate is 3.95 per cent a year, with interest compounding fortnightly. This means the amount ultimately owing can build considerably over a long retirement.

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For example, Services Australia illustrates a person receiving $750 a fortnight for 10 years. They receive $195,000 in payments, but the loan balance after 10 years has grown to about $239,270 because of compound interest.

A no negative equity guarantee applies, so the amount ultimately recovered under the scheme cannot exceed the value of the secured property.

The trade-off is therefore reasonably straightforward – accessing home equity can provide additional retirement income today, but the growing loan reduces the equity ultimately remaining in the property.

For retirees weighing up drawing more heavily on super against accessing some of the wealth held in their home, understanding how each approach affects future assets and income can be a useful starting point.

Question 2 

My wife turns 60 this year and has recently retired. She has $750,000 in super and I am 52 with $780,000.

Our home is paid off, we have $160,000 in savings and we currently live on my wage. We don’t need income from her super.

Should she leave her balance in accumulation or start a pension and re-invest the minimum payments?

One important point is that turning 60 doesn’t mean someone has to start drawing down their super.

Once a person reaches preservation age and satisfies a condition of release, such as retiring, their super becomes accessible. But there is no requirement to withdraw it simply because it can now be accessed.

Broadly, super can remain in accumulation, where investment earnings continue to be taxed within the super environment, or eligible super can be used to commence a retirement-phase account-based pension.

One attraction of retirement phase is that investment earnings on assets supporting the pension generally receive more favourable tax treatment.

However, an account-based pension comes with minimum annual withdrawal requirements. For someone under 65, the standard minimum is currently 4 per cent a year.

This creates an interesting consideration where the household doesn’t actually need the pension income.

Withdrawing money from super and simply reinvesting it outside super changes the environment in which that money is held.

Conversely, leaving everything in accumulation avoids compulsory withdrawals but forgoes the retirement-phase tax treatment on investment earnings.

Other factors can also become relevant, including investment strategy, future contributions, the amount eventually transferred into retirement phase and estate planning.

The important point is that retirement doesn’t automatically require a person to start spending their super.

Accumulation and pension accounts have different rules and tax treatment, and understanding those differences is the starting point when retirement income isn’t immediately required.

Question 3

I am 50 years old and have left my super to my fund to manage.

As retirement gets closer I am being told I should get more hands-on with investment decisions. Should I engage a financial planner to improve my investment returns?

It’s worth separating two things here – getting more engaged with your super and trying to beat investment markets.

Most super funds already employ professional investment teams to manage diversified portfolios containing assets like shares, property, infrastructure, bonds and cash.

If a member hasn’t selected an investment option, their money will generally be invested in the fund’s MySuper option.

Being more hands-on therefore doesn’t automatically mean selecting individual shares or trying to achieve higher investment returns.

As retirement approaches, understanding where your super is invested becomes increasingly important.

Useful things to understand include the proportion invested in growth versus defensive assets, the level of investment risk, diversification, fees and whether the investment option changes automatically with age.

Financial advice can help with investment decisions, super and retirement planning, but an adviser’s role shouldn’t simply be viewed as trying to outperform your super fund’s investment team.

MoneySmart describes financial advice more broadly as helping people make important financial decisions, including planning for retirement and reviewing super.

In fact, one useful question to ask an adviser is how they intend to add value.

Is the focus primarily on selecting investments, or on broader issues such as retirement income, contribution strategies, tax, super structure, Centrelink, insurance and estate planning?

Getting more engaged with super can simply mean understanding what you already own and whether it remains appropriate for the job it needs to do.

It doesn’t necessarily mean becoming your own investment manager, or assuming that changing investments will produce better returns.

Paul Johnston and Linda Panaszek are financial advisers within the IFS Trusted Advice Network.

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.