For most Australians, the family home is one of the biggest assets they’ll ever own, along with superannuation. Many retirees consider selling their home and downsizing to free up some money to support their lifestyle.

Before you downsize, it’s important to consider the impacts. Beyond the emotional and practical factors of moving out of your home and finding a new one, there are a range of financial aspects to consider as well.

Upfront moving costs – When you sell your home and purchase another, you’ll pay real estate fees, two sets of legal fees (on the sale and the purchase) and stamp duty. In major metropolitan areas like Sydney or Melbourne, this could add up to over $70,000.

Levies and building maintenance costs – If you downsize to an apartment or villa complex, you may be required to contribute to the cost of regular inspections and maintenance of essential services such as lifts and common areas as well as periodic building upgrades.

The Age Pension and downsizing

The amount of Age Pension you receive depends on the value of your assets and the income you receive. To measure this, the Australian Government employs the assets test and the income test.

The assets test – assesses a range of different assets including investments (e.g. cash, shares and managed funds), income streams, business assets and property. Importantly though, it does not include your principle home in the assessment. 

The income test – assesses the income you receive from all sources, including financial assets which have a set income rate applied (known as deeming) such as superannuation (only if over Age Pension age), cash and shares.

Why the tests are important

When you sell your home and downsize, you effectively free up money that could be invested and from which you could draw an income. This could change the government’s assessment of your assets and income and reduce or remove your entitlement to the Age Pension. That’s not necessarily a negative. You might find the additional income you can access more than makes up for the reduction in your Age Pension entitlement and leaves you better off.

Speak to a Financial Planner before you sell

To find out how much downsizing may impact your Age Pension, speak to a Financial Planner. Your planner will be able to show how the proceeds from the sale of your home, and any subsequent investments, could impact the assets and income tests. 

Case study

Graham is 74 and a widower. As his children have left home and he no longer needs the extra space, he decides to sell. He wants to 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 Financial Planner to get advice on how the sale will affect his Age Pension. His planner tells him that the $300,000 he will invest will count towards the assets test for his Age Pension. After taking some time to consider the pros and cons of selling, Graham decides to downsize his home, even though it will reduce his Age Pension.

Downsizing to super

If you downsize your home one option is to contribute a portion or all of the sale proceeds into super. From 1 July 2018, if you are aged 65 and over and sell your principle residence, that you have owned for at least 10 years, you will be able to make a non-concessional (after-tax) contribution to super of up to $300,000. Couples will be able to contribute $300,000 each.

These contributions will be allowed in addition to existing super rules and caps (other than the $1.6 million transfer balance cap which limits the amount of money you can put into a pension phase account). In addition, you will not need to meet maximum age or work test rules. For more information visit the ATO website.1

Importantly, don’t be too hasty. The new downsizing provisions don’t come into effect until 1 July 2018.

Seek professional advice

If you are considering downsizing your home, call 02 9046 1920 to speak to an EISS Financial Planner.