It’s the great Australian dream – to own a patch of dirt with your name on the title deed.
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, most Australians still want a place to call their own.
Our home is by far the biggest investment most of us will ever make. And even though prices in some areas are currently falling from their record highs of recent years, Australia still rates as one of the least affordable places in the world to buy a house.
That’s tough for young people hoping to enter the market, but those record prices are great news for retirees who scrimped and saved for years to put a roof over their head.
More than 80 percent of Starts at 60 readers own their homes outright, they told us in a recent survey, with 56 per cent owning properties worth more than $500,000. That’s a whole lot of money tied up in real estate! 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 makes good sense.
Rules announced in the Budget 2017-18 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.
It’s also 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 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 the key points that will help you get a feel for whether downsizing should feature in your retirement income plans.
Age Pension #101
First, the easy part. To get the pension, you need to be old enough. At the moment, that means 65 years, gradually rising to 67, depending on your date of birth (if you were born in 1957 or onwards, then 67 is your number). You can see what your personal eligibility age is by checking the Department of Human Services’ website.
There are also limits to how much wealth you can have and get the pension. We’ll dig into the income and asset tests in a moment but in short, everything you earn and everything you own goes under the microscope when you claim Age Pension. Wages, business income, your super, investments, car, household contents – the lot.
Only one major asset escapes the net, which is why it’s sometimes called the last great loophole.
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.
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 the loophole 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 there can be a trap. 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.
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 for example. 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.
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.
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 your income is determined to be up to $172 per fortnight (for a single person) or $304 (for a couple) combined, there’s no impact on the pension. The income test is reasonably generous, in that a couple can have income of $78,000 per annum and still receive a part-pension.
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.)
Assuming you’re a homeowner, these are the important numbers. A single person can have up to $258,500 worth of assets and receive the pension. Between $258,500 and $564,000, a part-pension is payable, and after $564,000, the pension eligibility cuts off entirely.
A couple can have combined assets worth $387,500 and receive a full pension, between $387,500 and $848,000 for a part-pension, before it cuts off entirely at $848,000.
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, $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 a few 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, thus qualifying the property for some exemption from capital gains tax,” BT’s Ashenden explains.
“Being over 65, 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.”
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 system runs to thousands of pages 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 Age Pension.
That’s why if you’re not sure how it will affect your personal financial circumstances, it’s a good idea to talk to a financial adviser about your retirement plans. That way you can make the best decision for you about upsizing, downsizing or staying right where you are.
Things you should know: Westpac Banking Corporation ABN 33 007 457 14 AFSL and Australian Credit Licence 233714 (Westpac). Information is current as at April 2019. This information does not take into account your personal circumstances and is general in nature. It is intended as an overview only and it should not be considered a comprehensive statement on any matter or relied upon as such. Before acting on it, you should seek independent financial and tax advice about its appropriateness to your objectives, financial situation and needs.