As the years roll by and the children start to build their own homes and families, the family home suddenly seems too large, too empty, and too much work to maintain. The idea of moving to a smaller, more manageable property suddenly becomes appealing, especially with the potential to free up some cash in the process.
While downsizing—selling the family home, buying something smaller and less expensive, and enjoying the leftover funds—can indeed seem like a financial windfall at first glance, this transaction isn’t as straightforward as it seems.
So before you start packing those boxes, there’s a critical financial consideration you need to take note of—downsizing’s effect on your golden years.
Downsizing your home can impact your government benefits, specifically your Age Pension.
The Age Pension, a lifeline for many retirees, is subject to both an income and assets test. While the family home is generally exempt from these tests, the proceeds from its sale are not.
Let’s break it down with an example. Imagine you sell your home for $1 million and buy a new place for $700,000. That leaves you with $300,000 in the bank. While it might be tempting to dream of holidays or new cars, be aware that this sum will immediately count as an asset and could affect your pension eligibility.
The money you plan to spend on your new home is exempt for up to two years, but the rest is not.
This is where deeming comes into play. Deeming is a set of rules used by Services Australia to estimate the income generated from your financial assets, which includes the proceeds from your home sale. This deemed income is then added to any other income you have, which could reduce your Age Pension rate.
Now, you might be thinking, ‘What if I put that $300,000 into my superannuation?’ It’s a valid strategy, and if you’re aged 55 or older, making a downsizer contribution to your super can be a smart move.
You can contribute up to $300,000 without it counting towards your non-concessional contributions cap, and it won’t affect your total super balance until the end of the financial year. But remember, this doesn’t mean it’s invisible to the assets test for Age Pension purposes.
So before making any decisions, it’s crucial to understand the asset test limits. These limits determine how much you can have in assets before your full or part Age Pension is affected.
For homeowners, the limits for a full pension range from $314,000 for singles to $470,000 for couples. For a part pension, the figures jump to $695,500 for singles and $1,045,500 for couples.
Non-homeowners have higher thresholds due to not having the exempt asset of a home.
Don’t forget about the additional costs associated with moving, such as real estate agent fees, stamp duty, and conveyancing fees, as well. These can eat into your surplus funds, reducing the amount you have left over and potentially impacting your pension.
If all this information feels overwhelming, you’re not alone. Navigating the financial implications of downsizing can be complex. That’s why Services Australia offers a free Financial Information Service to help you understand how your decisions may affect your pension or other government benefits.
In summary, while downsizing can offer financial benefits, it’s essential to approach it with a full understanding of the potential impacts on your Age Pension. By planning carefully and seeking expert advice, you can make the most of your downsizing decision without jeopardising your financial security in retirement.
We would love to hear from you, our YourLifeChoices readers. Have you considered downsizing? Share your thoughts and stories in the comments below.
Also read: Centrelink Q&A: How would shared housing affect the Age Pension?
The other consideration is capital growth.
Generally speaking, the growth in a free-standing property is considerably higher than that of flats/units/apartments.
If growth is 5% on the freestanding property, any growth in flats/units/apartments is likely to be around 2%.
A $1,000,000 property that grows at 5% per annum, would be valued at $1.628m in 10 years.
A $700,000 property that grows at 2% per annum, would be valued at $853k in 10 years.
A single person with $250,000 in assessable assets would receive a full age pension of $1144 p/f.
If the same person downsizes and places $300,000 into their super, the age pension drops to $436 p/f -a reduction of $18.408 per annum.
With lower mandated withdraws in early years from super in pension phase, the balance of super would potentially retain its value. That would mean $184,080 less in pension over 10 years.
Still thinking of downsizing?
Totally agree. I have a close single friend who now regrets being pushed (dare I say conned?) into downsizing. Her house wasn’t huge, but the inducements and enticements to downsize looked rosey. But the actual true practicalities have cost her dearly. She is now a fierce opponent of this, especially for a single person.
Good comment, Twig. Sometimes the unit is worth the same as your home, depending on location, etc. plus costs of moving. If you can, pay someone to do what you can’t (maintenance, cleaning, etc, which you may get some help with too on the pension) & keep doing what you know, where you know.
We are in the process of downsizing now, but we do not receive an Age Pension. The $300K downsizer contribution to super is gold for both of us, being 77 and 87 and in good health. Converted to an account-based pension, the income and the pension received by us is totally tax free (at least for now!)
There are two sides to every coin!
Hello Taragosun,
You are correct in your circumstances. Downsizing has benefits for sellers still working or self-funded retirees. But most retirees are on full/part pensioners.
Here is the one point not made. You could receive an annual amount of $65,000 (paid fortnightly or annually) from Services Australia at an interest of 3.95% (it’s the Government’s reverse mortgage, and not taxed) and see what the property growth would be in 5 and 10 years.
I would be surprised if you would not be better off with this option.
To self funded retirees with a partner in Agedcare beware of the effect of downsizing as the cash generated counts towards the means test when the govt calculates the means test daily charge.
Remember the RAD counts towards the means test also.
Cheers