Catherine de Fontenay

Retirees unwilling to depart with their family home aren’t making complete usage of all their wealth in retirement, according to research from the Productivity Commission.

Commissioner Catherine de Fontenay who co-authored the Wealth Transfers and their Economic Effects report released at the end of 2021 tells Professional Planner older Australians aren’t drawing down their wealth.

“They’re drawing down their bank balances but the value of their house is going up,” she says. “A lot don’t liquidate their house because they’re worried about how long they’re going to live or being able to afford aged care even though there are other ways to afford aged care.”

Australians lack confidence in retirement with 14 per cent over the age of 50 saying they are financially prepared for their aged care, according to research released last August from Challenger and National Seniors Australia.

Research from Challenger last December found only 40 per cent of people expected a “comfortable” lifestyle in retirement.

de Fontenay says people tend to hang on to the value of their wealth into their later years creating sizeable inheritances.

The PC research found wealthier parents tend to have wealthier children even before wealth transfers.

“If your parents are wealthy you’re likely to be wealthy, but a lot of the things your parents do to help you along in terms of schooling as well as attitudes to study and work and connections, all that happens much earlier in your life. If someone is wealthy in their 40s chances are their parents are wealthy, but their parents haven’t passed on a huge amount of cash.”

Advice crucial for less wealthy inheritors

The research suggests inheritances don’t impact social mobility for the higher wealth demographic but could be essential for the other side of the spectrum.

“For people in the bottom-fifth of wealth it does look like it has a life-changing impact,” de Fontenay says. “If your kids are not in that bottom-fifth then inheritances are small relative to their existing wealth.”

Overseas research as part of the report found poorer people that receive an inheritance tend to draw it down quickly and within four to eight years it has been spent.

“In Australia poorer people are not drawing down that inheritance but are investing and preserving the value of it,” she says.

“That’s not a statement we can make with a huge amount of confidence but the pattern does look somewhat different to overseas. If that’s the case, that’s encouraging for their financial stability and it suggests that lower wealth people that receive an inheritance are in need of good financial advice.”