Could downsizing save your retirement?

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Almost 40 per cent of respondents to our Financial Literacy Survey said they would consider downsizing to free up income for their retirement. We explore 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.

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.

Would you consider downsizing? If not, why not?

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Total Comments: 13
  1. 0

    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.

  2. 0

    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.

  3. 0

    english your second language ?
    is $20 million cash that $20 million house ok while receiving OAP ?

  4. 0

    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.

  5. 0

    Please re-write on your last comment. As it stands, it does not make any sense.

  6. 0

    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

  7. 0

    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.

  8. 0

    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’.

  9. 0

    ah tremor hard to forget your past!

  10. 0

    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.

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