'This can be a very emotional issue': the ins and outs of navigating equity for the over 55s
“It's been a long time coming,” says Florence Luk, Business Development Manager at HomeEquity Bank, when reflecting on recent changes to Canada’s Old Age Security (OAS) program.
The objective of the OAS program is to ensure a minimum income for those over 65 and help reduce the incidence of low income among this demographic. In July 2021, OAS benefits were automatically increased by 1.3%, a change that Luk insists is overdue.
Working to educate and build business with financial advisors in British Columbia, Luk said, “Since 1973, there hasn't been a significant increase to OAS. All the while, inflation continues to impact the ability of many Canadians to use these funds effectively. “In addition, in Canada’s federal 2021 budget, there is an increase of 10 percent to the program starting in July of next year.”
“For OAS recipients age 75 and over there was also a one-time $500 payout, a couple of weeks ago.” But, Luk elaborates, there is a sting in the tail. “$500 is a great windfall. However, one thing that people don't consider is that the $500 one-time payment is fully taxable.” Indeed, for many Canadians ready to put this money to work, this tax treatment might be surprising, and just one of the demonstrable ways in which OAS recipients can struggle with finances. Another example is the so-called ‘clawback’ tax.
“There is a 15 percent recovery tax – colloquially spoken as a clawback – for those recipients who have an income of over $79,845 a year,” Luk explains. “So, imagine you spend your whole adult life contributing to a plan. But then, when it comes to seeing the fruits of your contribution to the system, your net OAS benefits are ultimately conditional upon your most recent income level.”
“This can be a very emotional issue because a lot of people won't realize this recovery tax until after they have completed their taxes. All of a sudden, that money is now perceived as being taken from them. That's a pretty hard pill to swallow for most retirees, and unfortunately, those that are not working with professional advisers may not even know this until it's too late.”
And it’s such issues that HomeEquity Bank strives to provide a solution for.
The solution in question? It could begin at home …
“We work with many wealthy and affluent retirees,” Luk says, “but despite their wealth, they don't have the cash flow to live comfortably, as a significant portion is tied up in illiquid assets. For many Canadians, upwards of 70 percent of their net worth lies in their home value, which can now be tapped as a source of tax-free cash flow.”
“Similar to a traditional mortgage, the homeowner continues to own the home and enjoy its appreciation potential. A prime difference is that regular payments are optional, home equity can be tapped as tax-free cash, and the loan and interest only need to be repaid when you move or sell your home. The advantage for many affluent retirees is that their home’s appreciation potential is maintained and they are less likely to make big taxable withdrawals from retirement and investment accounts”.
“In contrast, when you withdraw from your retirement funds, it's fully taxable as income which could affect income-tested benefits like the OAS. One strategy is to take RRIF minimum withdrawals – but then subsidize your lifestyle with the tax-free money released from the equity in your home with a reverse mortgage. So you could be getting three wins here. You are definitely getting tax-free cash, but you also might be deferring the income tax on your RRIF and perhaps also getting a bigger portion of your eligible OAS too.”
“Being the correct age is also part of the qualification and obviously you have to live in and own your home to have a reverse mortgage. The surprise for many advisors is that we work with many clients that still have existing mortgages. That is generally not a challenge as many clients don’t have to have paid-off their home to take advantage of this solution.”
It’s an approach that is more than a job for Luk – and clearly something she feels very passionate about.
“I have worked with a lot of retirees over the years, and I can really see the impact of what we do,” she enthuses. “It's so powerful. I really do feel that we help people… especially a segment of Canadians that has often been isolated from options based on their employment ending.”
“I think it's unfortunate that people don’t know all the options available to help retired Canadian homeowners – but it’s exciting to meet advisors that are eager to learn about this solution for their clients over 55. Helping older Canadians age in place and improve their financial health is HomeEquity Bank’s mandate, and I truly believe that our products can help them live the lives that they’ve both earned and deserved.”