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Media Release | 11th November, 2021Has COVID or low interest rates had a bigger impact on retirement?

While it is too early to tell 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 from 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 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, Founder, Pension Boost.

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.

As we saw in the 2008 GFC, market downturn early in retirement can materially adversely impact the time over which the nest egg will last. The Forbes Advisor report also talks to taking out a reverse mortgage as a strategy to provide cashflow rather than selling growth assets during a volatile market.

Four Ways Covid-19 Has Changed Retirement – Forbes Advisor

The Pension Loans Scheme (PLS)

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.

The PLS advantage

Paul asked financial planner John Hazell from Richmond Partners in North Sydney for his views on senior’s thinking about reverse mortgages.

John stated that more of his clients are considering the Australian Government’s reverse mortgage option, the PLS, because of its advantages including:

  • The significant equity locked up in their home with no easy way to access it without selling or taking out a costly commercial reverse mortgage.
  • Its 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.
  • Access to additional in-home care services thanks to the additional cashflow, offering peace of mind for families knowing their loved one can stay in the family home longer while still being cared for.
  • Extra cashflow to cover home maintenance and medical care without having to sell.
  • Being able 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.
  • Delay the selling of other assets, potentially at a loss, during a volatile market.
  • Using the lower interest rate of the PLS (currently 4.5%) to offset 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.
  • For those in high-growth property markets such as Sydney, the family home is likely to continue to be a significant asset to pass on. Even with a loan such as the PLS against some of the equity, the historical property growth suggests that the accumulated debt would be outpaced by the property value over the next 5, 10 or 20 years.

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