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With the changes to the Centrelink Asset test that took place in January 2017, you may be asking whether investing in home improvements to lower your assets is a viable strategy.
Your home (primary residence) is often one of your most valuable assets and for the purposes of Centrelink its entire value is exempt from the assets test.
This means that if you legitimately invest to renovate or improve your primary residence you are essentially moving assets from being asset test assessable to exempt, as far as Centrelink is concerned.
The benefit of this can be that you could increase your fortnightly age pension.
The challenge is working out the Return on Investment of selling assets like cash, shares, property or managed funds, which can produce income, and using them to pay for home improvements.
The key considerations are:
- Lost income due to the sale of income generation assets
- Loss in assets as you pay away your capital for the renovation
- Increase in Centrelink Age Pension resulting from adjusted Asset Test
- Any financial return from home improvement or renovation – e.g. lower utility bills
- Your expected break even time frame
- The improved lifestyle from home improvement.
With this in mind, its worth exploring some of the ways you could increase your Age Pension through your primary residence and how big a financial impact this could make for you.
Some ways could include a simple home renovation to upgrade your kitchen, bathroom or add a new bedroom. As Centrelink does not see your home as an asset, therefore any money you invest into your own home increases your Age Pension.
For example:
If you really enjoy cooking and entertaining and are tired of your current kitchen then you may decide to do something about it. A renovation costing say $20,000, could result in a couple receiving an increase in your Age Pension of about $60 per fortnight ($1,560 per year).
To evaluate the Return on Investment we could say:
- Lost income on the $20,000 in cash could be approximately $540 assuming a cash rate of 2.7%
- Loss of $20,000 used to pay for the renovations
- Increase in Centrelink could be approximately $1,560 per year
- Financial returns from the improvement could be marginal reduction in utilities bills e.g. $100 a year
- Break even time frame could be about 20 years to return your $20,000 investment
- Lifestyle improvement, is personal but often an improved kitchen can be really enjoyed.
In this case there could be value in the renovation if you were comfortable with the time frame for return of capital
Note: that to be part of your home, it must be a permanent fixture. If it’s not permanent it could be part of your contents and be assessable.
Other Opportunities
What if you could make an investment into your house where you actually made a financial return from the home improvement?
One thing you can do which has gained popularity over the years is the addition of power generation to a home from Solar Panels.
Solar panels are a permanent structure, are considered part of your home and not assessable for the age pension.
Plus solar panels can reduce your power bill, saving you money.
According to the Synergy website, if a couple living in Mount Lawley, Western Australia purchased a 10kW solar power system for $15,000, the couple could save $3,654 each year on power bills.
That same couple could increase their Age Pension by a further $1,170 a year once they update Centrelink for their investment.
If we put this back through our ROI assessment then;
- Lost income on the $15,000 in cash could be approximately $407 per year assuming a cash rate of 2.7%
- Loss of $15,000 used to pay for the Solar Panels
- Increase in Centrelink could be approximately $1,170 per year
- Financial returns from the improvement could be up to $3,654 per year (according to Synergy)
- Break even time frame could be a little over six years to return the $15,000 investment
- Lifestyle improvement is very personal in this case.
In this case the net result from a cash flow basis could an increase of over $2,730 each year plus an estimated recovery time from for your investment of a little over six years.
The above two cases are very simplistic and certainly don’t take into account your personal circumstances which can have a significant impact on the viability of such a strategy.
The Centrelink Age Pension is a complex area of rules and primary residence rules can create complexity.
Want to know more?
If you are considering investing into your home to improve your lifestyle and potentially look at what gains can be obtained for your Centrelink Age Pension, it is important that you speak with a specialist.
Our Retirement Specialists at RSM can provide more detail on the Centrelink Aged Pension changes and discuss any strategies with you which may improve your Aged Pension Benefit. Click here to leave you details and a Retirement Specialist will contact you.
This page has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence No. 238282.
As everyone's circumstances are different and this article doesn't take into account your personal situation, it is important that you consider the above in light of your financial situation, needs and objectives, and seek financial advice before implementing a strategy.
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