Perhaps the dream isn’t a three-bedroom brick-and-tile on a quarter-acre anymore, but whether it’s an inner-city apartment or a renovator in the suburbs, some Australians still want a place to call their own.
Our home is likely to be one of the biggest investments most of us will ever make. And even though prices in some areas are currently falling, Australia still rates as one of the least affordable places in the world to buy a house.1
That can be tough for young people hoping to enter the market, but high prices can be great news for retirees who scrimped and saved for years to put a roof over their head.
According to a Start at 60 survey, more than 80 percent of Starts at 60 readers own their homes outright, with 56 per cent owning properties worth more than $500,0002. Of course, if you’re happy with your income, that’s a great safety net to have.
But if you’re unhappy with the amount you have to spend in retirement, selling your house, buying a less expensive property and using the cash to boost your super balance and thus your income, could make sense.
Changes that commenced on July 1, 2018, mean single retirees can contribute up to $300,000, and couples $600,000, from the sale of their main dwelling to super, without incurring any penalties or hitting any caps.3
It may also be more tax-efficient than using the money to invest outside super, Bryan Ashenden, BT’s head of financial literacy and advocacy, points out.
“If you can’t get it into the super environment, then you’re looking at investing in your own name and you’ll be paying tax at your own marginal tax rate,” he explains.
“But if you can put it into super and then move it across to a pension, then you’re going to be in a totally tax-free environment.”
But while this will increase the amount of income you can draw down from super, it may decrease or even remove your eligibility for the Age Pension. This is an important consideration, so we’ve set out some key points that may help you get a feel for whether it may be worth exploring if downsizing could feature in your retirement income plans.
First, the easy part. To get the pension, you need to be old enough. At the moment, that means 66 years, gradually rising to 67, depending on your date of birth (if you were born in 1957 or onwards, then 67 is your number).4
There are also limits on how much wealth you can have and qualify for the pension. We’ll dig into the income and asset tests in a moment but in short, everything you earn and everything you own is considered when you claim the Age Pension. Wages, business income, your super, investments, car, household contents – the lot.
There is one major asset that is excluded, however.
Your ‘principal home’ as the government calls it, and up to two hectares of land (about five acres in the old money) isn’t taken into account for pension eligibility purposes. It doesn’t matter whether your castle is a $50,000 shack or a $50 million waterfront mansion, it won’t impact your pension entitlement.5
Every few years, there are rumblings that the rules need to be tightened, making the family home assessable under the assets test. But millions of retirees – who, as various governments are very aware, all vote – have a strong desire to stay put in the family home. So for now, there hasn’t been a serious push to change anything.
Sometimes, people take advantage of this exclusion and upsize; in other words, buy a more expensive home in retirement to reduce their financial assets in order to maximise their pension entitlement.
Downsizing is far more common, though. But if you sell one home and buy a less expensive one, even if you’re using the new ‘downsizing’ superannuation rules, the money left over after you’ve purchased a new property becomes assessable.
For example, let’s take a retiree who sells the family home for $750,000, buys a smaller property for $500,000 and makes a $250,000 super contribution. The $250,000 paid into super becomes assessable under both income and assets tests.
When you claim Age Pension, your entitlement is assessed under both the income test and the assets test. The one that calculates the lowest rate of pension is the one that’s used.6
Let’s look at the income test first. All of your sources of income are added up, including ‘deemed income’ from financial investments like shares, bank accounts and account-based pensions.7
Deeming means that the government assumes your financial assets earn a specific rate of return, even though the real return you receive from them may be higher or lower than the deeming rate. The deeming rate is set by the Minister for Families and Social Services, based on the rates available on a wide variety of financial instruments.
If you’re looking at downsizing, though, it’s the assets test you need to take a closer look at.
As we’ve said, your home isn’t counted, but everything else is, including your furniture! (There’s some good news in that, though, because household contents are assessed at market value, not replacement cost.)8
Assuming you’re a homeowner, these are some important numbers. A single person can have up to $268,000 in assets and receive the full pension. Between $268,000 and $583,000, a part-pension is payable, and after $583,000, the eligibility to receive any Age Pension cuts off entirely.
A couple can have combined assets worth $401,500 and receive a full pension, between $401,500 and $876,500 for a part-pension, before it cuts off entirely at $876,500.9
If your assets are between the thresholds, making you eligible for a part-pension, you’ll need your calculator to work out what payment you’ll receive. Once your assets reach the lower threshold, your pension starts reducing by $3 per fortnight (single, or couple combined) for every $1,000 worth of assets you own above the threshold.
Putting that differently, if you’re already assessed under the assets test, every $1,000 in extra assets will reduce your pension by $3 per fortnight, or $78 per annum.
If you’ve got a mathematical bent, you’ll have worked out by now that the reduction in Age Pension is 7.8 percent of excess assets, so $100,000 of investments above the threshold will reduce the pension by $7,800 a year, even if those investments aren’t earning anywhere near that rate of return.
There are restrictions on who qualifies to use the downsizing-to-super rule.
“You have to meet the requirements of being at least age 65 and must have owned the property for at least 10 years, and qualifying the property for some exemption from capital gains tax,” BT’s Ashenden explains.
“Within this age range, if you are 67 or older, normally you’d have to meet the work test in order to contribute to super but in this instance, you don’t. It also doesn’t matter how much money you’ve already got inside super, you’re still eligible to contribute up to $300,000 (or up to $600,000 for a couple).”
If you’re not too sure about any of this (particularly Age Pension rate calculations) then don’t be alarmed, because you’re not alone. Legislation governing Australia’s retirement income is complicated and the rules change reasonably regularly.
What we’ve tried to do here is not make you an instant expert, but to show that although downsizing can be a great way to top up your retirement income, you need to tread carefully when it comes to the impact on the Age Pension.
If you’re not sure how it will affect your personal financial circumstances, seek advice from a financial adviser about your retirement plans. That way, you can make an informed decision about upsizing, downsizing or staying right where you are.
2 This has been based on a survey of more than 1,000 Starts at 60 readers, conducted by Starts at 60 in July 2018.
Article prepared by Starts at 60, June 2019 and reused by BT with permission. BT is a part of Westpac Banking Corporation ABN 33 007 457 14 AFSL and Australian Credit Licence 233714 (Westpac). Information is current as at August 2020.
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