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Downsizing in Retirement – Consider the Pros and Cons
26 September 2021
Written by Aaron Alston – Financial Adviser

An important topic to factor into your retirement plan is the possibility of changing home.  If you do decide to change home or “downsize” it’s important that you consider the advantages and disadvantages of doing so.

Pros and cons of downsizing your home

Sourced from https://moneysmart.gov.au/retirement-income/downsizing-in-retirement

Pros

  • Increased cash flow — Downsizing could free up money to pay off your mortgage, invest or spend.
  • Easier to maintain — A smaller place takes less effort to clean and maintain.
  • More convenient — You can choose a layout and fittings that better meet your needs, or a location closer to family, transport and services.
  • Lower insurance and utility bills — In general, a smaller home costs less to insure and is cheaper to heat or cool.
  • Potential to use the “Downsizers legislation” and make a $300,000 contribution (each) into Super.

Cons

  • Less space — A smaller place means less space for things, so you may have to make some hard choices.
  • Less flexibility — Your new place may have less privacy, fewer guest rooms, or less space for entertaining.
  • New neighbourhood — It may take time to get used to new surroundings.
  • Emotional connection — Your family home may be full of memories, which can make it difficult to let go.

Additionally moving has a cost.  This may include renovating your home before sale and the costs involved in selling and buying such as stamp duty, legal fees, real estate commissions and finding an affordable property in the area you wish to live.  You don’t want to be moving every 3-5 years and diminishing a significant portion of your retirement savings in moving costs.

Impact on Age Pension

  • Your eligibility for the Age Pension will depend on the assets test and income test. 
  • Your home is not included in the assets test.  When you sell your home, the proceeds may be exempt for up to 12 months, however the proceeds will be assessed under the income test.  This could have a dramatic impact on current or future aged pension entitlements.
  • If you are currently receiving an aged pension, you must consider the potential impact because you may lose up to $7,800 p/a in pension every year for every $100 000 converted from your non-assessable home to assessable financial investments.

Case Study

John and Anna are both aged 70 and own their home worth $750 000, have $250 000 in superannuation, $100 000 in personal effects and are considering downsizing.  They are both receiving full aged pension.

They both decide they want to sell their house for $750 000 and downsize to an apartment for $450 000, leaving $250 000 to invest after costs.  As they have reached pensionable age, all their financial assets are assessable, whether they are held inside or outside the superannuation environment. 

They would be converting part of a non-assessable asset, the family home, into an assessable asset, cash.  As a result, their total assessable assets would increase, and their aged pension would reduce.  John and Anna must decide if the increase in income they would receive from having an extra $250 000 outweighs the loss in pension entitlements.  They must also consider future capital gain on their home if they waited and sold in a few years’ time.   John and Anna may decide future capital gain and loss of aged pension entitlements outweighs the advantages of moving.

Possible things to consider once you have sold your home:

Consider Renting for 6-12 months – You might dream of escaping to the beach for your ideal retirement, but then realize you are too far away from friends and family.  If you move a long way from home, you may regret your decision.  You also must consider what will happen if either you or your partner dies.

Invest – Consider investing the proceeds.  If you are eligible for the aged pension your financial assets will be treated the exact same way under the income test irrespective if your money is held in savings or invested in items such as listed shares and securities or managed funds.

For Singles – under deeming rules the first $53,600 of your financial assets has a deemed rate of 0.25% and anything over $53,600 2.25%

For Couples and at least one member is receiving the pension – The first $89,000 of your combined financial assets has the deemed rate of 0.25% applied. Anything over $89,000 is deemed to earn 2.25%.

What will you buy – You may purchase a house, townhouse, unit, move to a retirement community or granny flat.

Potential to use Downsizers legislation:

The downsizers legislation was introduced from 1st July 2018. For those eligible, it allows you to contribute $300,000 into Super. This is not considered to be a concessional or non-concessional contribution so does not impact those limits. It is impacted however by the “transfer balance cap” (currently $1.7million) if moving to Pension phase. It is available to each member of a couple so in theory $600,000 could be contributed. You do not need to actually “downsize”. You do not even need to purchase another property. Eligibility requirements are as follows:

  • You must have owned your property for at least 10 years and it must have been your Principal Place of Residence at some stage.
  • You must not have used the downsizers allowance already.
  • You must be 65 years or over. (From 1st July 2022 it is expected that this age will reduce to 60).
  • The property is in Australia and is not a caravan, houseboat or other mobile home.
  • You make the contribution within 90 days from receiving funds from the sale.
  • The proceeds from the sale must be exempt or partially exempt from CGT.

Summary

  • Calculate all costs associated with selling and buying a new place and the emotional factors involved in moving
  • Consider the potential impacts to your aged pension
  • Most importantly, where you live, and your social network will have a massive influence on your health and overall happiness in retirement.





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