How can you make the most of your home in retirement? Last week we looked at the ways homeowners can maximise their retirement income by using this very valuable asset. Our focus was on those who plan to stay put in their ‘forever’ homes. This week we explain the options available to those who are choosing to sell up and relocate. Or to use the most common parlance, to downsize!
What is downsizing?
This may seem obvious, but ‘downsizing’ is a term now used so frequently that it can be a misnomer. It’s come to cover the notion of older Australians selling and relocating. But not everyone who sells is ‘downsizing’. Perhaps a better term is ‘rightsizing’. This can still cover those who find a large, expensive to maintain family home no longer as appealing as it once was. But some vendors buy larger, with very differently configured spaces, others go smaller, some go from the city to the country, others the reverse. Size is not really the major consideration. What is important from the outset is to understand that, whilst you are making a decision about property and homeownership, the financial implications can be huge. Knowing the main retirement income rules associated with downsizing is imperative. Let’s start with Age Pension entitlements.
How Centrelink treats home sales
While your wealth is in the asset of the family home, this asset is exempt from both an assets and income test assessment. This is a huge bonus for a retiree who can have secure accommodation without being penalised financially. If you sell your property, there is a ‘grace’ period on the proceeds before Centrelink will reassess your eligibility and your payments as reported in January this year,
As of 1 January, the exemption for downsizing funds is now two years. So you can ‘park’ this money in an appropriate account and it will not be included in any assets assessment for your Age Pension eligibility.
Income test assessment on the proceeds of downsizing has also changed. As of 1 January this year, the deeming rate applied to this portion of your savings is the lower rate, 0.25%.
What do you need to do?
Before you sell, if you are unclear about how much of the proceeds from such a sale will remain liquid (i.e. not used to repurchase), you need to fully understand asset limits which consider your current assets and any potential increases. This is to ensure that you do not inadvertently threaten your Age Pension entitlements. Losing this entitlement is a very real possibility. So do your homework first before you proceed. You will also need to inform Centrelink of any change in your assets within 14 days of settlement.
Super and the sale of your home
There are a few attractive super strategies that can encourage homeowner retirees to sell. One of the ‘big ones’ is the Downsizer Contribution strategy that allows couples to put up to a combined $600,000 into super after the sale of their primary residence. The notion of getting such a large lump sum into super without penalty is very appealing. BUT whilst this is also usually tax effective, you will still be converting proceeds from a Centrelink-exempt asset into a financial asset. You therefore need to be very careful not to be surprised by any sudden loss of entitlements.
Two other strategies that can work in tandem with the sale of a family home are the Bring Forward Rules and the Younger Partner rule. The latter can involve transferring profits from your home sale into a younger partner’s super (accumulation) account, increasing the likelihood of Age Pension eligibility for the older partner.
Again, knowing all the rules of super and how they apply to your age and lifestage, as well as potential property transactions, is of critical importance.
Buying another property
The true cost of selling and buying a primary residence can be quite high. Typical charges when selling include:
- Real estate agent fees and charges
- Refresh/presentation costs
- Legal fees
- Mortgage discharge fees
- Transfer fees
- Relocation costs
Costs for those purchasing can include:
- Stamp duty
- Legal fees
- Building inspections/reports
- Mortgage fees
If you are selling in order to reduce a worrying mortgage, it may be useful to speak first to an adviser to see if there are other ways of managing this debt , before pressing the ‘go’ button on a full-scale relocation – especially if your heart isn’t really in it!
Using home equity
As we noted last week, we will be explaining the three forms of accessing home equity in a future article. But it’s useful to remember that while it was mentioned for those who are staying in their current property, home equity access remains a valid option for all retiree homeowners, including those who are in a newer property.
Deciding to rent
It may be that home ownership seems all too hard and you wish to sell up in order to free some funds and to become a renter. Only you can judge if this is the right decision, but it’s worth noting that rentals across Australia have risen by about 10% over the past 12 months. We are going through a period of housing shortages, so it is possible you will find it more challenging to get accommodation that suits in the right location, at an affordable price. The best way to judge this strategy is to do your research by checking out rental properties where you wish to live and testing how easy it will be to secure one. Additionally, checking the ramifications of such a sale against potential Age Pension entitlements is very important. As you are not planning on using the proceeds from your home sale to fund another property, you will need to ensure there are no unexpected repercussions when the Centrelink grace period of two years has ended.
Moving home can be a major cause of stress, so best to do this only if you feel both excited and committed to the prospect. Some reasons NOT to sell include:
- Feeling bullied into it by over eager partners or adult children
- Being worried you will run out of money before you have analysed your long term Retirement Income Forecast.
- Believing that a radically new home in a different neighbourhood will make all your dreams come true.
There’s a lot to be said for thinking – and deciding – slowly. And that’s only after fully considering all the pros and cons of staying, going, managing a mortgage, super and entitlements has been thoroughly investigated.
What about you?
Are you thinking of downsizing? Or rightsizing?
Or have you already done so?
How did the big move work for you?