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ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
ANDERSON, Kate
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ANDERSON, Kate

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  • 1. Reverse Mortgages A Solution For Asset Rich/Cash Poor Retirees Strategic Ramifications & Planning Opportunities Speaker: Kate Anderson Company: Mariner Financial Date: Wednesday 22 November 2006
  • 2. What Will Be Covered?
    • Reverse Mortgages
    • Target clients for financial planners
    • Common applications
    • Social Security Considerations
    • Assets and Income Test
    • Gifting
    • Case Studies
    • Undertaking home renovations
    • Allowing proceeds to accumulate
    • Paying off the mortgage for ageing parents
    • Lump sum, drip feed and re-draw options - impact on social security entitlements
    • Funding an Accommodation Bond
    • Special Disability Trust Measures
  • 3. Reverse Mortgages
    • A reverse mortgage, commonly referred to as an equity release loan, is a mechanism which allows a consumer to convert part of the equity locked up in their home into a lump sum, a regular stream of payment or both
    • The borrower retains title to the property and the outstanding loan balance grows over time as interest is capitalised, rather than being repaid
    • The borrower is usually not required to make any repayment on the loan until they die, sell or vacate the home
    • A reverse mortgage is generally available to those aged 60 years or over who own their own home
    • The amount that is available to be borrowed is usually between 15% and 40% of the total value of the home as valued by an approved valuer
  • 4. Large and Rapidly Growing Community
    • Consumer needs in retirement is great
    • 2.6 million retirees in Australia
    • 2.1 million own their own home
    • 80% of these are on the pension and retired with less than $70K
    • Retirement population is growing
      • 2.1 million in 2004 = 11% of total Australian population
      • Expected to grow to 25% of Australian population
      • Over time we will see people approaching retirement, retiring on more than $70K as they have had more years in the superannuation market
    Source: Australian Bureau of Statistics
  • 5. Financial Pressure in the Household
    • Average weekly household income for Australians between 55 and 64 = $1,035
    • Reduces significantly >65 to $540 per week
    • 68.4% rely on the government for primary income
    • 80.2% own their own home with no mortgage
    • Highest projected Australian growth segment is >85 which is projected to grow
    • from 1% to 7-11% by 2010
    • Pension growth below cost of living
    Source: *HILDA Wave 2 Australian Bureau of Statistics The average Australian pensioner has a gap to fill Household final year income 55-59 =$62,376* Pension = $12,711.40 $
  • 6. Australia’s Fastest Growing Segment is 65 yrs +
    • 13% Australians > 65 (i.e. 2.6 million)
    • By 2020 - 19% > 65
    • By 2050 - 27% > 65
    • Children can maintain a higher standard of living than their parents
    • Many children would prefer their parents to utilise assets to maintain quality of life
    Source: Trowbridge Deloitte
  • 7. Clients Who Can Use a Reverse Mortgage
    • Target Clients for Financial Planners
    • People 60 years and over:
      • Current retiree clients with investment funds locked up and with short-term
      • cash needs
      • Lapsed retiree customers with some investment history but no investment
      • funds remaining (perhaps lapsed Allocated Pension clients); and
      • Non-clients who are retired with asset/income imbalance but no investment
      • history
    • Clients in accumulation phase who are currently supporting their parents
  • 8. Common Applications
    • Supplementing existing funds with regular cash flow
    • Covering essential services such as medical costs
    • Undertaking home renovations
    • Paying out an existing mortgage
    • Generating an income stream
    • Funding ongoing home care
    • Paying an accommodation bond to an age care facility
    • Relieving the burden on the accumulator who is supporting a parent who owns
    • their own home
    • Making a contribution into superannuation
    • For wealthier retirees who wish to pass on their inheritance while they are alive by
    • borrowing funds against the value of their home and giving it to intended
    • beneficiaries
  • 9. Issues That Should Be Considered
    • Projected movements in interest rates and property prices
    • Variations in consumer’s life expectancies and old-age caring and housing needs
    • Intergenerational tensions and conflict between the desire to leave an inheritance
    • and the need for money to live on in older age
    • How much care they may require both at home and perhaps in aged care facilities
    • and the costs of such needs
    • How much super they have and how much if any government benefits they may
    • be entitled to
    • If they receive regular payments from a provider, whether there will be sufficient
    • funds available to sustain these payments for the rest of their lives
  • 10. Social Security Considerations
    • The Social Security Act has special rules covering home equity conversion
    • agreements, which means:
    • “… . an agreement under which the repayment of an amount paid to or on behalf of the person, or the person’s partner, is secured by a mortgage of the principal home of the person or person’s partner”
    • Implications for both the Income and Assets Tests
    • Note
    • The monies advanced from a loan are not income under the Income Test; and
    • The loan itself is not an asset under the Assets Test
  • 11. The Assets Test
    • Under a reverse mortgage, where the amount borrowed is unspent:
      • The first $40,000 is not counted as an asset for 90 days; and
      • The amount over the first $40,000 is counted as an asset immediately
    • Where the amount borrowed is spent, depending on what the funds are used for,
    • further assessment may be necessary
    • If the amount is spent on non-assessable items (e.g. repairs or improvement to
    • the principal place of residence) no further assessment is necessary
    • If the amount is spent on assessable items (e.g. a motor car) the relevant
    • Income and Assets Test will apply
  • 12. The Income Test
    • The amount advanced under a reverse mortgage is not income itself; rather any
    • additional income assessable under this Test depends on how the loan proceeds
    • are used
    • Where the unspent part of the loan is held as a financial asset (e.g. bank account,
    • shares, managed funds) it will be subject to deeming. Where the loan is spent on
    • consumer goods, no additional income is included under the Income Test
    • Financial investments under the deeming provisions of the Income Test are
    • ‘ deemed’ to earn a certain rate of income no matter what rate of income is actually
    • earned
  • 13. Case Study 1 - Undertaking Home Renovations
    • Couple, both age 75
    • Asset rich – family home valued around $500,000
    • Income poor – full age pension only*
    • They do not want to sell their home
    • Tap into $30,000 home equity to renovate interior and exterior of home
    • $30,000 is spent immediately
    • No deemed income under the Income Test
    • $30,000 spent on home improvements (an exempt asset) and therefore does not
    • count towards assessable assets
    • Full age pension not affected*
    • * Based on social security rates effective 20 September 2006
  • 14. Case Study 2 – Allowing Proceeds to Accumulate
    • Single pensioner aged 75
    • In receipt of the full age pension*
    • Tap into $90,000 home equity and allow loan proceeds to accumulate in bank
    • account
    • The $90,000 is being held as a financial asset (bank account)
      • Deemed income on full amount immediately
      • Up to $3,732 p.a. ($144pf) counted as income
      • Could lead to a reduction in the age pension
      • Income free area $128pf*
    • $50,000 of the loan when held in bank account will count as an asset immediately
    • After 90 days, the remaining $40,000 will also count as an asset
    • * Based on social security rates effective 20 September 2006
  • 15. Case Study 3 – Paying Off the Mortgage For Ageing Parents
    • 45 year old accumulator
    • Paying mortgage for ageing parents
    • Siblings unable to contribute
    • Parent home worth $500,000
    • Outstanding loan worth $40,000
    • Parents tap into $60,000 home equity
      • Apply $40,000 to settle existing mortgage and $20,000 to renovate bathroom
      • Keep capital and investment plan intact
      • Burden of supporting parents carried by the estate and will be shared equally
      • by siblings
  • 16. Case Study 4 – Impact on Social Security Entitlements
    • Rex and Bonny both aged 70 have paid off their family home now valued at
    • $900,000
    • Their only other assets are lifestyle assets of $30,000 and financial assets of
    • $40,000
    • They are in receipt of the full age pension*
    • They decide to borrow $225,000 (LVR 25%) against the value of their property
    • What options do Rex and Bonny have as to how they can receive the $225,000,
    • and how will this impact their social security entitlements?
    • Option 1: A single lump sum of cash
    • Option 2: A drip feed facility; allows Rex and Bonny to receive a regular cash
    • payment over a number of years ($1,250 each month)
    • Option 3: A re-draw facility; allows Rex and Bonny to request cash advance whenever needed ($2,000 each month); or
    • Option 4: A combination of the above
    * Social security rates and thresholds effective 20 September 2006
  • 17. Option 1: Lump Sum The receipt of the $225,000 is not assessed as income for social security purposes ($40,000 is taken in cash and used immediately for living expenses) The $40,000 is subject to deeming as a financial investment under the Income Test from the date of its receipt The excess over $40,000 ($185,000) will also be subject to deeming under the Income Test from the date of receipt as it is being held in a bank account which is deemed as a financial investment. However, the deemed income will reduce as the amount borrowed is spent. The $40,000 is being spent within 90 days of being received and is therefore not assessed for the Assets Test The excess over $40,000 ($185,000) is assessable as an asset immediately under the Assets Test as it is being held in a bank account. Income Test Assets Test
  • 18. Option 1: Lump Sum * Social security rates and thresholds effective 20 September 2006, includes Pharmaceutical Allowance Subsequent to reverse mortgage Prior to reverse mortgage $19,973* in yr 1 Social Security Age Pension $22,391* in yr 1 Social Security Age Pension $11,974 (deemed amt) $225,000 Financial assets Cash/Bank Account $1,200 (deemed amt) $40,000 Financial assets Cash/Bank Account Income $0 Assets $30,000 Lifestyle assets Car/Home Contents Income $0 Assets $30,000 Lifestyle assets Car/Home Contents
  • 19. Option 2: Drip Feed The approved loan amount is not the property of Rex and Bonny until the funds are accessed As the regular monthly cash payments of $1,250 are low and being used immediately they will not be assessed under the Income Test. The undrawn amount remaining in the facility (i.e. the amount that is being held but not attracting interest) will also not be deemed as a financial investment under the Income Test. The undrawn amount remaining in the facility for the benefit of Rex and Bonny but not attracting any interest will not be assessed under the Assets Test. These are not monies that are at Rex’s and Bonny’s immediate disposal. Income Test Assets Test
  • 20. Option 2: Drip Feed * Social security rates and thresholds effective 20 September 2006, includes Pharmaceutical Allowance Subsequent to reverse mortgage Prior to reverse mortgage $22,391* in yr 1 Social Security Age Pension $22,391* in yr 1 Social Security Age Pension $1,200 (deemed amt) $40,000 Financial assets Cash/Bank Account $1,200 (deemed amt) $40,000 Financial assets Cash/Bank Account Income $0 Assets $30,000 Lifestyle assets Car/Home Contents Income $0 Assets $30,000 Lifestyle assets Car/Home Contents
  • 21. Option 3: Re-draw Facility The approved loan amount is not the property of Rex and Bonny until the funds are accessed Rex and Bonny’s withdrawal request each month of $2,000 is low and as it is being used immediately for living expenses it is not assessed under the Income Test. The undrawn amount remaining in the facility (i.e. the amount that is being held but not attracting interest) will also not be deemed as a financial investment under the Income Test. The undrawn amount remaining in the facility for the benefit of Rex and Bonny but not attracting any interest will not be assessed under the Assets Test. These are not monies that are at Rex’s and Bonny’s immediate disposal. Income Test Assets Test
  • 22. Option 3: Re-draw Facility * Social security rates and thresholds effective 20 September 2006, includes Pharmaceutical Allowance Subsequent to reverse mortgage Prior to reverse mortgage $22,391* in yr 1 Social Security Age Pension $22,391* in yr 1 Social Security Age Pension $1,200 (deemed amt) $40,000 Financial assets Cash/Bank Account $1,200 (deemed amt) $40,000 Financial assets Cash/Bank Account Income $0 Assets $30,000 Lifestyle assets Car/Home Contents Income $0 Assets $30,000 Lifestyle assets Car/Home Contents
  • 23. Option 4: Combination of Lump Sum & Drip Feed The approved loan amount is not the property of Rex and Bonny until the funds are accessed ($40,000 is taken in cash and used immediately for living expenses) The $40,000 is subject to deeming as a financial investment under the Income Test from the date of its receipt. However, the deemed income will be reduced as the amount borrowed is spent. As the regular monthly cash payments of $1,250 are low and being used immediately they will not be assessed under the Income Test. The undrawn amount remaining in the facility will also not be deemed as a financial investment under the Income Test. The $40,000 is being spent within 90 days of being received and therefore is not assessed for the Assets Test. The remaining loan amount that is being held and not attracting any interest for the benefit of Rex and Bonny will not be assessed under the Assets Test. These are not monies that are at Rex’s and Bonny’s immediate disposal. Income Test Assets Test
  • 24. Option 4: Combination of Lump Sum & Drip Feed * Social security rates and thresholds effective 20 September 2006, includes Pharmaceutical Allowance Subsequent to reverse mortgage Prior to reverse mortgage $22,391* in yr 1 Social Security Age Pension $22,391* in yr 1 Social Security Age Pension $2,724 (deemed amt) $80,000 Financial assets Cash/Bank Account $1,200 (deemed amt) $40,000 Financial assets Cash/Bank Account Income $0 Assets $30,000 Lifestyle assets Car/Home Contents Income $0 Assets $30,000 Lifestyle assets Car/Home Contents
  • 25. Gifting
    • From 1 July 2002, a single or married couple can gift up to $10,000 each financial year, with a maximum of $30,000 over a five year period
    • Gifting (disposal) of assets worth more than the allowable amount or free area is known as “deprivation”
    • Deprived assets are:
    • Included in a pensioner’s assets until the fifth anniversary of the date that the
    • disposal was made; and
    • The total value of a pensioner’s deprived assets are added to the value of all other
    • financial investments. Deeming rates are then applied to the total of a pensioner’s
    • financial investment to calculate their assessable income.
  • 26. Gifting
    • If Rex and Bonny choose Option 3 to access the equity in their home, how much are they able to gift over a 10 year period without affecting their social security entitlements?
    • Over a 10 year period a maximum of $60,000 can be gifted
    $60,000 Total - 10 - 9 $10,000 8 $10,000 7 $10,000 6 - 5 - 4 $10,000 3 $10,000 2 $10,000 1 Gift Year
  • 27. Case Study 5 - Funding an Accommodation Bond
    • Effective 1 July 2005, lump sum accommodation bonds paid by residents are
    • exempt from the Asset Test
    • Aged care residents who pay a component of the bond by periodic payments are
    • able to rent out their former home without the value of their home or their rental
    • income affecting their Social Security entitlements
    • If an aged care resident rents out their former home to pay some or all, of the
    • bond by periodic payments, the former home is exempt from the Assets Test for
    • as long as they are liable to pay the periodic payment
    • Financial planners may be able to structure the affairs of a client entering into low
    • level care so as to keep the age pension as well as the family home
    • The rental income from their home can then be used to fund some of the costs of
    • a residential age care facility
  • 28. Case Study 5 - Funding an Accommodation Bond
    • Single pensioner aged 75
    • In receipt of the full age pension*
    • About to enter into low level (hostel) care and asked to pay an accommodation
    • bond of $135,000, however they do not wish to sell their family home
    • Decides to pay the accommodation bond in periodic payments, which is made up
    • of two components, the amount the service provider can deduct annually for up to
    • five years, and also the interest that the provider would normally earn on the lump
    • sum
    * Based on social security rates effective 20 September 2006
  • 29. Case Study 5 - Funding an Accommodation Bond Residential aged care costs * Social security rates and thresholds effective 20 September 2006 $30,426 p.a. Total $13,500* p.a. (10% x $135,000) Periodic payments 10% is the maximum interest rate (July – Sept 2006) $3,282.00 p.a. ($273.50 x 12 months) Retention amount $0.00 p.a. Income tested fee In receipt of the full age pension $13,644* p.a. ($37.38 x 365 days) Basic daily care fee Bond is greater than $125,500 and therefore the non-pension basic daily care fee applies
  • 30. Case Study 5 - Funding an Accommodation Bond Total income * Social security rates and thresholds effective 20 September 2006 $26,315 p.a. Total $13,000 p.a. ($250 x 52) Rental income $13,315* p.a. Social security age pension Paying bond by periodic payments and therefore able to rent former home without the value of the home or the rental income affecting the age pension. Former home will be exempt from the Assets Test for as long as the periodic payment is paid
  • 31. Case Study 5 - Funding an Accommodation Bond
    • $4,111 shortfall!
    • Accessing the equity in his home may enable a person entering into low level
    • (hostel) care to bridge the gap between the residential fees they have to pay and
    • the total income they receive from the combined age pension and rental income
    • Certain issues must be considered if the payment of an accommodation bond via
    • periodic payments is funded through a reverse mortgage
    • Tax issues - CGT exemption
      • Insurance on the home
      • Cost of financial plan initially and ongoing
      • Ongoing management issues of residential home being let
  • 32. Case Study 6 - Special Disability Trust Measures
    • Effective 20 September 2006
    • The measure will assist families to make private financial provision, through a
    • special disability trust, for the future care and accommodation needs of their
    • children and close relatives with severe disabilities
    • The trust must be established solely in order to provide for current and future care
    • and accommodation needs of the beneficiary
    • The assessable assets of the trust will be exempt from the means test to
    • $500,000 (indexed annually)
    • Under the Assets Test, where the assessable assets of the trust are in excess of
    • the $500,000 limit, the balance is to be assessed as the beneficiary’s assets
    • Under the Income Test, the income derived by the trust and income received from
    • the trust by the beneficiary are exempt from the Income Test
  • 33. Case Study 6 - Special Disability Trust Measures
    • Couple, both age 70
    • Daughter, aged 19 is severely disabled – in receipt of the full disability support
    • pension
    • Asset rich – family home valued at $550,000
    • Income poor – full age pension only*
    • They don’t want to sell their home, however they are unable to provide their
    • daughter with the extra financial support she needs for the ongoing care now and
    • after they have passed away
    • Tap into $225,000 home equity and contribute into a special disability trust with
    • their daughter as the principal beneficiary to provide for her current and future
    • accommodation and ongoing care
    • Full social security pensions (age pension and disability support pension) not
    • affected*
    • * Social security rates and thresholds effective 20 September 2006
  • 34. Social Security Implications – Wrap Up
    • Be aware of the social security rules
      • How the proceeds from a reverse mortgage are used may affect social
      • security benefits
      • Careful advance planning as to how and when the funds are spent may help
      • borrowers to retain benefits
    • Why borrow money and let it sit in the client’s bank account for 90 days?
    • Why borrow the money in the first place if it is not needed?
    • Important to remember that periodic payments:
      • Are a return of capital and are not taxable
      • If spent and not accumulated, do not count under the Income Test
      • Are backed by a 100% Assets Test exempt asset (family home)
  • 35. 2006 Federal Budget Announcements
    • Impact on reverse mortgage strategies
    • Undeducted contributions
      • Personal after-tax contributions will be limited to $150,000 p.a. (three times
      • the limit for concessional contributions). A higher cap of $1 million will apply
      • for the transitional period from 10 May 2006 to 30 June 2007
      • Nearing or approaching retirement – strategy involving selling investment
      • property and contributing proceeds into super
      • Option – reverse mortgage on investment property
    • Pension Assets Test
    • The Assets Test taper rate for pensions will be halved. Pension recipients will
    • only lose $1.50 (not $3.000 per fortnight)
    • For example, based on current pension rates and thresholds, the proposed
    • changes mean the pension will not cut out until a single homeowner’s assets
    • exceed approximately $494,000 (currently $325,500). A homeowner couple will
    • receive part pension if their assets are under $783,500 (currently $503,200)
  • 36. Action Plan
    • Review Existing Client Database:
    • Retiree customers with investment funds locked up and short term cash needs
    • Lapsed retiree customers with no investment funds remaining
    • Current accumulation customers who are supporting their parents
    • Current retiree customer with asset/income imbalance
    • Due to the implications a reverse mortgage may have on a client’s personal
    • circumstances financial advice should be a mandatory requirement for the product
    • providers to release funds
    • Log on to www.marinerretirement.com.au to access reference material, quick
    • reference and technical guides
  • 37. Disclaimer The information contained in this presentation is for financial advisers only and is not to be passed on to retail clients, unless it forms part of the financial adviser’s own advice to the client. The information is not a securities recommendation. It is a guide only and based on legislation current as at September 2006. We believe the information contained in this update has been obtained from reliable sources but we cannot be responsible for any errors, omission or inaccuracies .

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