Q: I might be in a position to sell the family home and release $900,000. If I bought a land-lease home for, say, $300,000, would the remaining $600,000 in released equity be treated as an asset when Age Pension eligibility is considered?
A: The short answer is ‘yes’, although exactly how it will be treated will depend on what you do with the released equity.
Any amount you use to purchase a car, boat or caravan will simply be assessed at the market value (second-hand value) of the asset for the purposes of calculating your pension. Any amount you invest into a bank account, term deposit, shares, managed funds or superannuation will be assessed at the market value and also deemed to earn income.
The current deeming rates are historically low at 0.25 per cent per annum for the first $53,000 of financial assets and 2.25 per cent per annum on the assets above the $53,000 threshold.
As a general rule, the income test won’t hurt you as much as the assets test will. Let’s say you invested all of the $600,000; under the income test, your pension would be around $794 per fortnight but under the assets test, your pension would be $0. Whichever test results in the lowest pension is the one that is applied.
So, you can see why the assets test is the real problem. Asset reduction strategies such as pre-paying your funeral expenses and gifting within the allowed limits ($10,000 per financial year and no more than $30,000 over five years) can be worth considering.
You may also want to seek advice about purchasing a lifetime annuity. These products receive favourable treatment with regard to pension eligibility, with only 60 per cent of the amount invested counting under the assets test and 60 per cent of the income counted under the income test.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.