Crunching the downsizing numbers

As anticipated, the Government did indeed introduce a proposal in Budget 2017/18 to encourage retirees to downsize, thus freeing up housing stock. However, there may be a financial sting in the tail for those considering making a move.

Under the Budget 2017 proposal, retirees can, from 1 July 2018, make a non-concessional contribution of up to $300,000 ($600,000 for couples) into a super fund from the proceeds of the sale of their primary place of residence, if they have lived there for 10 years or more. Contributions can be made regardless of account balances and the earnings will be subject to preferential tax treatment.

The scheme was conceived as a means to ease the housing affordability crisis by making more stock available when seniors downsize.

At the same time, it will save the Federal Government millions of dollars in Age Pension payments to retirees with moderate amounts of super who take part in the scheme and subsequently have their Age Pensions reduced or lost altogether.

Fortunately, participating in the scheme is not compulsory and individuals should carefully consider their own specific long-term financial circumstances before making a decision.

Analysis by certified financial planner and director at AA Financial Planning Kane Jiang, shows that single retirees with a private income are especially vulnerable to being disqualified from receiving the Age Pension if they sell their homes. Mr Jiang puts it bluntly: “Do not sell until you get advice!”

Together with Mr Jiang, we reviewed three scenarios based on the YourLifeChoices retirement tribes, to understand how the scheme may affect retirees differently, assuming:

  • each single or member of a couple is 65 years old
  • in a couple, both husband and wife have an equal super balance
  • have proceeds of $1.2 and purchased a house worth $600,000
  • pay maximum non-concession contributions allowable into super
  • a conservative five percent portfolio return (interest) from super
  • no other assets
  • live to life expectancy
  • living expenses increase by three pre cent CPI per annum
  • no change of Centrelink Age Pension rules

Case study 1: Tom – the affluent single homeowner
Tom has private income and $550,000 in super, does not currently receive an Age Pension and has living expenses of $35,287 per annum.

If Tom sold his house, then puts $300,000 into super and invests a further $300,000 in cash at three per cent interest, he would remain ineligible for the Age Pension.

Assuming he reached a life expectancy of 85 years, his net financial assets would remain above $690,000 for 20 years, catapulting him above the threshold for the Age Pension entitlement.

The assumption, which includes yearly spending of $35,287 according to estimates in the latest YourLifeChoices Retirement Affordability Index, means he would be able to live off super and the interest of the cash investment.

However, if Tom retained his home, his assessable financial assets would fall below the threshold at age 66 and he would be entitled to a part Age Pension.

Over time as the assets diminished further, the amount of the Age Pension would increase and across the 20 years he would receive $433,000 in Age Pension payments while having retained his $1.2 million house (in today’s dollars) plus further assets of $225,000.

Case study 2: Rod and Diana – cash-strapped couple
Rod and Diana have $75,000 in super, income from a full Age Pension and have living expenses of $34,111 per annum.

Living on a limited income, if Rod and Diana were to sell their home, they would find that their Age Pension would reduce immediately by almost 80 per cent, as they drew down on payments from their new super balance of $675,000.

Assuming that Diana lives to 88, the combined net financial assets at the end of 23 years would be about $250,000 plus a $600,000 home.

In that period Rod and Diana would have been paid a total of $980,000 in Age Pension payments.

However, if Rod and Diana keep their $1.2 million home, their low super balance means they would be entitled to almost the full Age Pension from age 65. Across 23 years that would total $1.2 million and not only would their original house be worth more, they would also still have $27,000 of their nest egg left over.

Case study 3: Jeff and Liz – constrained couple
Jeff and Liz have $300,000 in super, receive a part Age Pension and have living expenses of $35,643 per annum.

Having managed to save $300,000 in super, Jeff and Liz could see their total balance boosted to $900,000 if they sold their house and deposited the maximum non-concessional contribution.

They would, however, lose their part Age Pension immediately and it would only begin to be paid again at a very low level when they turned 69.

It would take 23 years for the level of the Age Pension to equal the amount they drew from super. Even after having collected a combined $665,000 in Age Pension payments, they would still have net financial assets of $334,000 in today’s dollars plus their downsized home.

However, if they kept their original home, Jeff and Liz would be able to receive more than 70 per cent of a full Age Pension, equating to $1.2 million over 23 years.

Despite the more modest nest egg without the extra non-concessional payment of $600,000, there would still be a super balance of $110,000 when they turned 88.

Kane Jiang said the three scenarios took into account general data that could vary considerably between retirees.

“It is important to consult a financial planner who understands your individual circumstances before making the big decision to sell a home,” he said.

Kane Jiang (Dover Financial Advisers – AFSL no 307248) joined the financial planning industry in 2007 – just one year prior to the Global Financial Crisis! He has a Graduate Diploma of Financial Planning qualification and is also a Certified Financial Planner (CFP) Professional and a member of the Financial Planning Association (FPA) Australia.

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.

Related articles:
Incentive for retirees to downsize
Downsizing and the Age Pension

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