Downsize or upsize maximises entitlements for retirees in Australia

This time next week many Australians will enjoy gathering with extended families and friends. Hopefully you’ll find this a convivial occasion. It’s also a time when the spotlight is fixed firmly on the family home.

Whether you’re rushing around cleaning, decorating, cooking or preparing for guests, every room in the home is suddenly in use! This can prompt us to wonder if we are in a large home which is only fully utilised one week a year. In fact it can lead us to question if our home is still fit for purpose. Does it actually even suit our retirement needs?

Which brings us to this week’s discussion point; is it time to rightsize? To move closer to grandkids or relocate to a lower maintenance dwelling? Maybe even live on the coast? And then there’s the matter of size.  We’ve all heard about a Downsize in retirement… but what about an Upsize? Your dream home may be one with water views from your bedroom. But did you realise that buying that on-trend apartment on the water’s edge might also increase your Age Pension entitlements?

Most people are familiar with the Age Pension assets test exemption of your home (and up to two hectares of land around it). There is no cap on the value of the exempt property. This means that someone could be living in a home with a market value of $6 million dollars, but unable to pay the electricity bill to light it properly. In these circumstances, it is common to sell the home and buy a cheaper one, freeing up wealth to help provide an income in retirement. This is the common understanding of ‘Downsizing.’ 

But there is another way of approaching this that you may not have considered. This happens when someone has kept a modest house but worked hard over a lifetime and built substantial wealth outside the family home. 

Let’s use the example of Simone and Travis. This couple has a home worth $450,000 and superannuation of $1,000,000 – the same amount of assets as Daniel and Judith who have a home worth $1,000,000 and superannuation of $450,000 . However, one of these couples is eligible for $43,000 per annum in Age Pension entitlements, and the other is probably eligible for none. Can you tell which is which?

It’s Daniel and Judith who will qualify.

If Simone and Travis were to sell their  $450,000 home and contribute an additional $550,000 from their superannuation toward the purchase of a home worth $1,000,000, then they would have a remaining super balance of $450,000 and be eligible for around $43,000 in Age Pension entitlements.  

While Simone and Travis will have a lot less super to support themselves in retirement they will be getting an additional $43,000 in Age Pension payments to compensate.  the reduction in super may of course result in them worrying that  they’re in danger of running out. This is when our old friend ‘Downsizing’ comes into play. Simone and Travis might enjoy the views for many years, and then later in retirement consider purchasing a comfortable home, but something a little more modest. They might even be able to contribute some of the proceeds back into super if they meet the downsizer contribution rules such as owning the property for at least ten years.  As they have control over the price point for their ‘forever home’, they can calculate the entitlements they will continue to be eligible for once they’ve moved. 

There are many considerations beyond those related to an Age Pension. Selling the family home is not for everyone. It can be an emotional challenge and there are high costs associated with selling and purchasing property in Australia. The idea of moving house in later retirement can also be a turn off. However, this type of ‘Upsize’ offers a very real way to live the dream, hearing the gentle sound of the ocean  as you drop off to sleep every night…

Is this for you?

Is Upsizing something either you or someone you know has thought about? Does the example of Simone and Travis present a handy way you could make such a move possible? If you’re considering either downsizing or upsizing there are potential Age Pension and superannuation consequences either way. It’s important to be fully aware which type of retirement housing is best for you, both now and later on. Retirement Essentials experienced advisers can discuss your unique situation in more detail in one of the following advice consultations. 

Maximising your entitlements
Your home and your retirement options