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Downsizing in retirement

Downsizing in retirement

The family home has a lot of value. It has memories, familiarity and comfort. It also has a lot of equity tied up in those four walls that you may want to release during your retirement.

There are many reasons you might consider selling your home and buying a smaller place to live. The retirement income system encourages it. It might be because the family home is too large to maintain or health issues make a smaller home more suitable for you. It could also be that you want to move closer to family or are looking for a sea or tree change and a move to quieter pastures in retirement. No matter the reason, it’s good to know the financial implications of downsizing before you decide to sell.

The Age Pension and downsizing

Your Age Pension depends on the value of your assets and your income. The limits and amounts are outlined in the assets and income tests.

The assets test adds up all your different assets such as cash savings, investments, shares, super income streams, business assets and investment property. These are called ‘total assessable assets’ and there are some exemptions. Most importantly, it does not include your principal home.

From 1 July 2020, a single homeowner can hold up to $268,000 in assets before their Age Pension is affected and cuts out if they have more than $583,000 in total assets. For couples, the range is between $401,500 and $876,500 ($1,031,500 if the couple is separated due to illness)1

When you sell, you have 12 months to buy a new property before the money is considered part of your assets test, but the income you receive will be part of your income test.

The income test takes into account any income you receive from all sources. When it comes to financial returns, the Government uses a set income rate, known as the ‘deeming rate’ regardless of what you earn.

In 2020, a single person saw their Age Pension reduce by 50 cents for every dollar earned over $178 per fortnight, which means the pension cuts out at $2,066.60 per fortnight. For a couple, they can earn up to $316 and their pension entitlement cuts out at a combined income of $3,163.20. If you’re living apart due to ill health, the cut off is $4,093.20 combined2.

There are variations depending on whether you receive rent assistance or have dependents, so it will pay to get some financial advice.

Why the tests are important

When you sell your home and downsize, you effectively free up money that can be invested and included in your income. This will change the government’s assessments and may affect your Age Pension.

It’s not necessarily a negative. You might find the additional income more than makes up for the reduction in your Age Pension and leaves you better off. It’s a fine balancing act a financial expert can help you manage.

Don't forget the costs of downsizing

Beyond the emotional and practical factors in moving out of your home and finding a new one, there are the costs of buying, selling and moving to consider as well.

Upfront moving costs – When you sell your home and purchase another, you’ll likely pay real estate fees (usually between 1% and 2% of the sale price), two sets of legal fees and the significant stamp duty on the purchase. In major metropolitan areas like Sydney or Melbourne, this could cost up to 5% of the purchase price. And don’t forget the moving costs can run into the thousands if you’re changing towns or states.

Levies and building maintenance costs – If you downsize to an apartment or villa complex, you will be required to contribute to the cost of regular inspections and strata fees for maintenance, as well as periodic building upgrades.

Downsizing to super

So where do you invest the residual money once you’ve downsized? One option is to contribute a portion into super. You can contribute up to $300,000 into your super as a downsizer contribution if you’re aged over 65, it’s your principal residence and you have owned it for at least 10 years. Couples will be able to contribute $300,000 each. No super caps, work test or superannuation balance tests apply3.

It still counts towards your assets test for the Age Pension, but the main benefits are investing your money into an account that offers potentially better returns than a bank account or the deeming rate, and a tax-free income.

Case study

Graham is 74 and a widower and his savings are running low. As his children have left home, he no longer needs the extra space and he thinks it might be time to sell the family home. He thinks he can sell his house for $900,000, buy a cheaper apartment for $600,000 and invest the remaining $300,000.

Before he puts his house on the market, he contacts his EISS Super financial planner to understand how the sale will affect his Age Pension.

His financial planner explains that the costs of selling and buying a new property may be around $40,000. If Graham gets the price he expects, it will reduce his investment amount to $260,000, which means his pension is under the assets test threshold. But as this amount will be deemed, this means Graham is expected to earn $184 per fortnight, which will reduce his Age Pension by $3.11 per fortnight. He also pointed out that Graham has 12 months to hold the sale proceeds before it becomes assessable under the assets test.

This still puts Graham ahead in terms of his regular income and it will give him the financial buffer he wanted. Graham decided to put his house on the market first before looking for a new home. He is more confident knowing his limits and is now prepared to buy something higher, knowing it wouldn’t hurt his fortnightly income.

NB: For the purposes of this case study, we have assumed Graham doesn’t have any other assets or income.

Seek professional advice before you downsize

To really understand the impact downsizing may have on your Age Pension and retirement plans, contact an EISS Super financial planner on 1300 369 901 (option 2), or visit eisuper.com.au/appointment. They will be able to show you how the proceeds from the sale of your home, and any subsequent investments, could impact the assets and income tests.


1 Services Australia. Age Pension, how much you can get, assets test
2 Services Australia. Age Pension, how much you can get, income test
3 Australian Tax Office, Downsizing contributions into superannuation