Downsides and upsides of downsizing
THE Australian Housing and Urban Research Institute (AHURI) published a report late last year looking into the issue of retirees downsizing from the family home into something smaller.
AHURI found that Australians tend to downsize in response to significant life events, such as a health scare or the death of a spouse rather than as a response to Government initiatives.
Australians generally enter retirement living in a house that’s worth a lot of money. And that’s where people stay, which means that money wrapped in their house cannot be used for other purposes as they age.
There is evidence that downsizing decisions are influenced strongly by the effects downsizing might have on pension payments.
The family home is excluded from pension means testing and this prompts pensioners to tread carefully lest money left over from the sale of the family home reduces their pension payment.
This is especially true for part pensioners.
A single pensioner on a full pension with little or no savings or other assets can sell the family home, downsize to something smaller, have, say, $185,000 left over and still receive the full pension.
Part pensioners on the other hand may find that what’s left of the sale of family home is then spent on bills and groceries because their pension payment has been reduced or has disappeared altogether.
The AHURI report lists a number of options people have, including accepting that freeing up money by downsizing may reduce pension payments but may at the same time increase overall retirement income.
And it’s true, even in retirement you can now make a one-off contribution to superannuation of up to $300,000 from the proceeds of selling your home. This contribution will not be exempt from the Age Pension means test, but the contribution will be tax free.
There is also the Pension Loan Scheme. This Scheme makes it possible to access home equity without physically downsizing. The Scheme is effectively a reverse mortgage that allows Australians over the Age Pension eligibility age to annually borrow up to 150 per cent of the Age Pension against the value of their home. This will mean you or your estate will get less after the sale of your house in return for access to cash now. The payments from the scheme will be included in the means tests, which may reduce your pension payment.