5th Jun 2018

Could downsizing save your retirement?

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Could downsizing save your retirement?

Almost 40 per cent of respondents to our Financial Literacy Survey said they would consider downsizing to free up income for their retirement. Kaye Fallick explores the good, the bad and the ugly about this tactic.

The term ‘downsizing’ has become synonymous with retirees cashing in their large homes to fund longer years in retirement. In fact, a surprising 39 per cent of the 5064 YourLifeChoices members who responded to our Retirement Income and Financial Literacy Survey (February 2018) said this was their preferred strategy to supplement or stretch their retirement income. They ranked this strategy ahead of annuities, reverse mortgages and loans.

But what does the label ‘downsizing’ really mean? Is it as simple as selling high buying low, and pocketing the difference or are there major traps inherent in this popular retirement ploy?

In this issue of the Retirement Affordability Index™, we consider the definition of downsizing, review the various rules attached to the strategy and analyse the potential rewards and implications for your retirement income, including for the Age Pension.



Definition
Downsizing is defined by the Australian Securities and Investments Commission (ASIC) as “selling the family home (as) one way to free up cash for retirement”. This happens when a retiree sells his or her principal residence and buys a lower-priced (typically smaller) residence in order to free up funds.

Many of the current generation of retirees were able to buy homes in inner-city suburbs; homes that are now worth in excess of the median prices for these suburbs – maybe $1 million or more.

It makes sense for those in homes that are now larger than their needs to ‘downsize’ to a smaller property. That may be a flat, a townhouse, a retirement village or a home which is located further from the city centre and therefore usually much less expensive.

Another common version of downsizing could more properly be termed a tree or sea change. This relates to retirees who opt to live somewhere far less populated, often a coastal town or a country retreat. It may be that the new property can be bought for less than the sale of the existing home, but not always. Property in very popular seaside resorts can be extremely expensive, so the retirees concerned must take into account stamp duty and legal fees.

The new location might also prove to be a more expensive area, as goods and services involve extra petrol and transport costs, while telecommunications and medical services may be less accessible.

The rules
How does the tax office treat downsizing? As we are discussing the family home (your principal place of residence, not an investment property), you should be aware of a few key regulations. First, a family home is exempt from capital gains tax, so there is no likelihood that form of tax will reduce any gains from such a sale.

While you own it, the family home is also exempt from the Age Pension assets test. But as soon as this asset is converted to cash (even if you are holding this cash only until you buy again) then it is viewed to be earning income, and the deemed income will be used to assess your pension eligibility.

It is not deemed as an asset for 12 months, but it is certainly deemed to be earning income. So you have effectively swapped an exempt asset for income, which is used to measure any Age Pension entitlements. You may well lose your Age Pension, or have it reduced, while you ‘park’ this money before buying another property.

If you do indeed re-purchase at a lower net price (after all costs of sale and purchase have been deducted), you will have a cash balance. This is now an asset that must be declared. Again, you may find your pension eligibility is threatened if you exceed $556,500 as a single homeowner, $759,500 as a single non-homeowner, $837,000 as a homeowner couple and $1,040,000 as a non-homeowner couple.

This can possibly be avoided under new legislation introduced in the 2017-18 Budget by Treasurer Scott Morrison.

New legislation
On 1 July 2018, the so-called ‘downsizing’ assets test will change. This will allow retirees to make a non-concessional contribution of up to $300,000 (singles) or $600,000 (couples) into super from the proceeds of selling their primary place of residence, if they have lived there 10 years or more. This contribution applies even if the super balance exceeds the current $1.6 million cap. Income from this super nest egg will be taxed at 15 per cent, rather than at normal tax rates. It is not compulsory to participate.

That is just as well because, as YourLifeChoices’ modelled case studies reveal, most Age Pensioners will be worse off in the long run, despite the apparent concessionary treatment. Selling an exempt asset seems to mean that the deemed income and increased asset level is highly likely to severely reduce your Age Pension possibilities. (Consider Ann’s warning and the effects on the Age Pension.)

The rewards
Despite the many pitfalls inherent in such a significant property decision, the rewards are worth considering. Many people do reach a stage in their lives when they feel their existing home is simply too big or too expensive to manage. They also may wish to try a new lifestyle in a different area or a different style of accommodation, perhaps something more modern or lower maintenance. Others like the idea of created communities such as retirement villages or purpose-built communal housing. And the experience for many who have made such a change can be extremely positive.

Take your time
Selling a home in which you have lived for many years and perhaps raised a family, also has emotional implications. As does moving away from a community in which you have felt comfortable and connected. These broader social and emotional considerations can be just as important as the financial.

If nearly 40 per cent of retirees are considering using their largest asset to stretch their retirement income, it is a decision that should be taken with the support of objective and qualified financial advice. The full implications of such a move on health, wellbeing, money and family need to be considered.

The numbers
According to the Productivity Commission (Housing Decisions of Older Australians, 2015), about 20 per cent of people aged 60 or over have sold their home and bought a less expensive one since turning 50.

Another 15 per cent have “strong intentions” of doing so in the future.

Social and emotional factors, rather than financial considerations, are the main reasons for downsizing:

  • less upkeep 30 per cent
  • more suitable accommodation 15 per cent
  • free up money 14 per cent
  • live closer to family 12 per cent.

 


Related articles:

All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.





COMMENTS

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TREBOR
5th Jun 2018
11:57am
Downsize at your peril. We've been through this one times many - if you downsize and retain capital in the bank, your pension will be cut, and cut at the rate of interest the Good Colonel C'Link deems for you, regardless of market rates and actual rates.

That will always be higher than what you actually gain as 'income' from the interest..... so you are actually losing unless you are living off the proceeds of selling your home, which is precisely what this 'policy' is all about - forcing pensioners to live off their accumulated assets first before getting a full pension.

The government threw in a little sweetener - if you put that money into your super, you won't be slugged... what if you don't have super? What if your current super and then top-up doesn't even return to you the equivalent of a pension?

Again this is a hidden thrust in this policy - and you can believe me - the backroom boys and girls (paid for at your expense already - staffers etc) at Party HQ will have gone over this with a fine tooth comb.

On top of that - how much will you really have left over from selling your metro home and moving to a coastal area? Noticed the massive rises in costs in those latter lately?

Once a market like this gets into full swing - with pensioners rushing to sell their primary asset to 'down-size' - how long before the market in Downsizeville goes through the roof?

So you want to go on pension and rent instead...

The Good Colonel may well consider that since you have too much money in the bank AND you gave up a home to go into rental, you will not receive Rental Assistance - I don't recall any definitive statement along those lines from 'government', and this will inevitably be a 'regulatory' matter left in the hands of the Good Colonel (able-bodied to the right - sick etc to the gas chamber) - and you know what that means.... no way in the world will Colonel C'Link, under Fat Hank, even consider any leeway for you.

Fool's Paradise....... small residence in Europe for part-year..... Delta Foxtrot Echo.

I may be down-sizing - but part of my intention is to buy a large sailing boat I can live on.... and sail away (Enya)....
TREBOR
5th Jun 2018
12:01pm
Damn! Must've hit the wrong button.

That's:-

Fool's Paradise.....

I may be down-sizing - but part of my intention is to buy a large sailing boat I can live on.... and sail away (Enya)....small residence in Europe for part-year..... Delta Foxtrot Echo.
Rae
5th Jun 2018
1:36pm
Just don't go via the Suez if you can help it. Way too dangerous now.

I went through in 2012 and we had to wrap up in razor wire and form into a very expensive convoy to get through the Gulf of Aden and past Somalia.

I'd recommend one of the Greek Islands. Rent less than $50 euro a week and just hire a boat. My choice would be Patmos.
TREBOR
5th Jun 2018
2:15pm
I was wondering about the Horn of Africa and pirates and all along that increasingly hostile coast. I wanted to do the Silk Road in a camper, but too many hostiles that way these days.... even if many of them are Muslims and bound by strict codes of hospitality - too many such these days throw the rules out the door.... along with a few heads.

Find me a US or Royal Navy pirate patrol ship and stick with it....
TREBOR
5th Jun 2018
2:17pm
I like Greeks.... good with knives... lady at the ex's art class is married to a Greek guy - they do regular trips.
TREBOR
5th Jun 2018
11:59am
I don't see no singin'.. c'mon boys... when you wuz slaves - you sang like birds...

Why are the other comments not showing (echo chamber)
patti
5th Jun 2018
12:32pm
Not sure what I would downsize to - a caravan perhaps?? and I have to spend the money I received from taking out a reverse mortgage so I could do housing repairs, quickly, so they don't reduce my pension. Even though it's not possible to complete all repairs within a month or so! Crazy
Rae
5th Jun 2018
1:40pm
This is the problem of putting rich people in charge of everything. They have absolutely no idea of how the real world works. They are always very surprised by consequences.

This downsizing play just as the markets move into the down cycle reminds me of the $1 million the suckers put into Super just before the stock market collapse.

If anything Government timing should be treated as a contrarian signal. Do the opposite of their latest brainfart.
TREBOR
5th Jun 2018
3:16pm
A tent under a bridge....
Sundays
5th Jun 2018
4:25pm
Yes Rae, I remember going to a seminar on Super when a man told us he had sold his house and put it all in Super. Even the presenter was shocked. I’ve often wondered what happened to him post GFC.
niemakawa
5th Jun 2018
1:37pm
The "Rules". These will continue to change and the Government of the day will keep tampering with them until the pension is lost altogether. This scheme is really a means of including the family home in the assets test. It is quite evident to me that anyone who does not downsize will be penalised.
niemakawa
5th Jun 2018
1:44pm
Warning "This is theft by the Government". DO NOT DO IT.
GrayComputing
5th Jun 2018
2:59pm
It is time for all of us to rant at our MPs and Senators to take action for human decency and a huge stress reduction for pensioners

NO ASSET TEST FOR A PENSION EVER AGAIN!
A pension is not welfare.

Most economist say we will save taxpayers money by dropping asset testing because of the massive overheads cost in running Centrelink and the 10,000 conflicting rules.

Hiring more Centrelink staff will only increase taxpayer’s costs for processing the creeping insane red tape monster system politicians and well paid bureaucrats have created.

Help scrap it now. Become a hero.

Even poorer New Zealand has a NO ASSET pension so it is cheaper and user friendly.

Why worry that few million$ earners get it too. That is peanuts to them, not enough for a good vintage champagne.

Do retired and retiring people really look forward and want 100++ visits to/from Centrelink and be part of 3 million waiting queues and lost calls?

Does your MP really like being part of the system that allows this indirect abuse of the elderly?

This abuse is actually sponsored by our government and forced down to Centrelink and borders on a criminal act.

Why do MPs normally compassionate persons let this Centrelink abuse happen at taxpayers’ expense?

We need to tell our MP and senators and the opposition and greens that these criminal asset tests for a pension must be dropped now.

NO ASSET TEST FOR A PENSION EVER AGAIN!
Len Spyker
5 St Joseph Close
Stirling
WA 6021
0414 825 232
redmond2@iinet.net.au
niemakawa
5th Jun 2018
3:02pm
Keep posting this wherever you can.
robmur
5th Jun 2018
4:33pm
We downsized in 2012 to a smaller, one year old, very modern home in a small, semi rural area in an outer eastern suburb of Melbourne. Sold our former home and purchased this one in one week. How lucky were we. Not a hitch anywhere in the whole process. In fact we paid a smaller amount over and above what we got for the sale of our former home. Therefore our part age pension wasn't affected. Don't believe all those that say "Don't do it". That is just plain rubbish. One good thing we did was use the same real estate agent to sell our former home and buy our current one. Couldn't be happier with the whole process.

5th Jun 2018
5:24pm
Yes - retirees should be encouraged to downsize especially those claiming OAP. Should e mandatory for them, or lose the OAP .

Its a rort that is in urgent need of fixing.
TREBOR
5th Jun 2018
6:10pm
Fascist...... on der trains, pensioners... Raus.. RAUS.. or we send in der dogs!!!! Ve Haff vays off meking you sell your home!

WHY should it be mandatory? Lay it all out for us chapter and verse..... WHY??
Sundays
5th Jun 2018
6:35pm
Rorts for everyone with a home? Or just these mysterious pensioners living in $10m homes. I’d like to know why too. Robmur downsized but not to a cheaper home. We did the same ourselves. Do you mean downsizing or forced to buy cheaper places. Please explain Raphael
Anonymous
5th Jun 2018
6:56pm
Ok I'll try to make this as simple as possible.

Many and I dare say a majority of pensioners manipulate their assets as they reach retirement in order to be eligible for OAP.

Strategies include upgrading to a more expensive house, expensive renovations, stashing cash outside the legal purview of Centerlink or all of the above and more.

Then we have honest people like myself who live in modest homes and as a result have other assets that exceed the threshold

Those in the former category are just cheap thieves, rorters who manipulate the system and often resort to criminal acts like stashing cash in order to receive OAP and the host of benefits that come with it.

Hence my dear Trebor and Sundays, dont you think its only right that these people should downsize to 1 or 2 or maybe 3 bedroom apartments or townhouses or a small house in the suburbs, failing which they lose any OAP.
niemakawa
5th Jun 2018
7:10pm
Nothing wrong in having a 20 million dollar house and receiving a pension. That's life, some make good decisions in life and others just potter along. The age pension is a right for al that qualify. No, before uou ask, I do not have a house worth millions, just a moderate home. Seems to me you are envious of those that have a differnt lifestyle to your own.
Anonymous
5th Jun 2018
7:16pm
english your second language ?
is $20 million cash that $20 million house ok while receiving OAP ?
niemakawa
5th Jun 2018
7:16pm
You seem to be under the impression that by reducing the pension for some the Government will increase the pension for others. That is wishful thinking and will never happen. Just be happy with what you have and don't concern yourself with others. Be nice to your fellow man.
niemakawa
5th Jun 2018
7:19pm
Please re-write on your last comment. As it stands, it does not make any sense.
Anonymous
5th Jun 2018
7:38pm
Thats not my impression at all. Stop trying to read my mind. Instead read what I wrote instead of putting you're own twisted interpretation.
Such a dumb ass
niemakawa
5th Jun 2018
8:03pm
Having a bad day Raphael. We all get them. Now start counting all the cash you have hidden away!! It may make you feel better. BTW you have self-descibed yourself perfectly.
Sundays
5th Jun 2018
8:18pm
I don’t agree with you Raphael because like many others, I think the OAP is a right. Personally, I think living on the full OAP would be hard, and am thankful we could save and live on more. Some people retire and spend money on upgrading their homes, their cars, furniture White goods etc. Have a nice holiday with the little money they have, knowing full well that they will never be able to save it again. They apply for their right to the OAP. This is not rorting, or theiving. It’s legitimate. If some are hiding assets, how will we be able to tell the difference. Centrelink are spending millions trying to catch cheats. You can even dob them in. If you don’t qualify for even a part pension then your assets or income are too high. Suggesting that there should be no state funded OAP for anyone with a home is not the society we want to live in. People should not have to sell their homes, or use up every cent they’ve saved first. The current system is far from perfect but your idea really would result in ‘rorting’.
heemskerk99
5th Jun 2018
9:04pm
ah tremor hard to forget your past!
Kathleen
5th Jun 2018
9:27pm
Raphael, a house is more than bricks and mortar to some people. Some may disregard the monetary value because it is where they raised their family and where their children and grandchildren come to visit and stay. It is the heart of the family.
That is not us though! We have moved interstate to a seaside location away from the city but not beachfront or luxurious but still the heart of the family.
People should be permitted to choose.
TREBOR
5th Jun 2018
9:40pm
I don't see an answer to my question, heebie-jeebie.

WHY should it be mandatory? Lay it all out for us chapter and verse..... WHY??

Kathleen - they shouldn't be allowed to choose - IT IS THEIR RIGHT!

We are not serfs to some self-appointed clown who jumps up and says he(she) is god and deserves to be treated as such and obeyed in every whim.
Rae
6th Jun 2018
9:22am
No the rort happened back in 1970s when Fraser stole the Welfare fund. Still paying 7.5% tax every year if you are PAYG of course because we know the wealthy avoid taxes in hundreds of ways.

We should confiscate the Future Fund. Put an independent team in charge and start directing that 7.5% back into where it belongs. Our Welfare not Big Business, foreign corporations and contractors or politicians pockets.

Everyone over 67 who lived here 30 years or so should get a universal pension not discriminated against.
Cowboy Jim
10th Jun 2018
12:36pm
Certainly a lot of jealous people about today. Of course we do everything we can to maximise our fixed income. I saw the writing on the wall long ago and retired at 58. A lot of younger people reading this forum will come to the same conclusion. Use your savings till you are 67 and then apply for the pension. Should you have some money parked away at pension age only causes you grief as the usual wasters would like to get their hands on it.


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