Beware implications of downsizing

Ann recently sold her home to downsize and deposited the funds in her bank account until she bought a new dwelling. This had implications for her Age Pension and she wants to warns others of her experience. Financial adviser Kane Jiang explains why. 

Ann
I sold my home to downsize from four bedrooms and a granny flat, now that I am widowed, mum has passed on and the kids have left home. 

Centrelink subsequently advised that I owed them money because of pension over-payment due to being assessed on my (temporary) bank account before buying another home. 

I disputed this and lost. 

I spoke personally with one of their representatives and it was clearly pointed out to me that while my house sale proceeds have not been assessed as an asset, they have been moved to “income” and assessed at 100 per cent to reduce my pension considerably.

I believed that proceeds from the sale would not be counted as an asset for 12 months. I can’t fight Centrelink. I know when I am beaten. I have repaid them the $1300 they demanded (which I cannot afford to do) and now live on a reduced fortnightly pension until my house sale proceeds are cleared from my bank account after my new home purchase. I will be 70 this year and I am not up to fighting “the establishment” any further.

I write this to warn other potential retirees who might be thinking of downsizing.  

Kane Jiang, financial adviser
Without knowing much about Ann’s personal assets and income situation, apart from what she has told us, this seems to me to be a classic misunderstanding of differentiating “assets test” and “income test” assessment.

Yes, proceeds should be exempted as “assets”, i.e., if you sold the house for $1 million (which is not uncommon if you are in Sydney as this is the median price), then your $1 million is exempted in the assets test for the next 12 months or until you purchase your next home.

However, as this $1 million will generally be put into a cash account prior to buying the new home, and cash is also “financial investment”, then this asset will be assessed for the income test.

Using the present deeming rates, the $1 million will be “deemed” to give about $30,000 per annum of income, and would certainly reduce one’s Age Pension entitlement under the income test. 

Are you thinking of downsizing? Were you aware of the potential implications for the Age Pension?

The information contained in this document is general advice only and does not take into account your specific individual circumstances. Please contact AA Financial Planning if you are seeking personal financial advice suited to your particular situation.

Written by Janelle Ward

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