2023 has become known as the year of the downsizer, and it’s likely 2024 will follow a similar trend.
Many Australians are making the move and downsizing from their family homes, either to combat the cost of living crisis or to find a more manageable and lifestyle-friendly property.
An important question many seniors ask is, ‘How will downsizing affect the aged pension?’
The sale of your home is likely to mean you have more money in the bank, so your retirement income may be affected. Take a look at how downsizing may affect the aged pension.
The aged pension
If you want to receive the aged pension, there are eligibility criteria you must meet, and this includes a means test.
Your assets (e.g. the property you own and the amount of cash you have in the bank) and your income are taken into account when determining the pension amount you're eligible for. As your assets are reviewed three times a year, selling your home to downsize can obviously have an impact on how much pension you are eligible for.
The asset test
When you downsize, the profits you make from selling your home become part of your assets. While your new, smaller property will also be taken into consideration, additional funds from the sale may impact your Aged Pension. It's essential to be aware of how these changes in assets can affect your pension payments.
The value of assets you can hold and still be eligible for the aged pension varies. For example, as reported by Retirement Essentials, the threshold for a couple that owns a home is $986,500
Speaking to an accountant or financial adviser can help you figure out how the sale of your property will affect your aged pension.
The income test
Apart from the asset test, downsizing might also affect your pension through the income test. If you invest the proceeds from selling your home and earn income from those investments, it could impact your pension payments. Understanding the rules around deeming rates and income assessment is crucial to managing your finances effectively.
The income you can earn and still be eligible for the aged pension varies, however it starts at around $204 per fortnight for a single person and then changes gradually if you earn more than this amount.
In short, if you have higher-value assets and or your income is higher after the sale of your home, it’s possible you will no longer be eligible for the full aged pension.
What can you do?
While downsizing might inevitably lead to some loss on your aged pension, there are strategies to make the most of the funds you have during retirement.
Professional advice: It’s always wise to seek professional advice when dealing with your income and livelihood. A financial advisor, SMSF expert or aged pension specialist can help you organise your finances so you can still qualify for the aged pension if possible.
Timing: Timing your downsizing can be crucial. Consulting with financial experts can help you figure out the best time to sell your property to lessen the impact on your aged pension.
Alternative investments: Consider investments that may have fewer impacts on your pension. Certain investments are exempt from the pension income test, and diversifying your portfolio can be a smart strategy. This is an excellent topic to discuss with a professional for advice.
Government initiatives: Stay informed about government initiatives. The Australian government occasionally introduces schemes to encourage downsizing for seniors, offering specific benefits that can aid in your decision-making process. For instance, currently, if you are 55 or over, you may be able to add as much as $300,000 of the proceeds of your home sale to your superannuation as a non-concessional contribution.
Want to find your dream home for downsizing and retirement? Get started today.
IMPORTANT: Any tips or advice contained in this article are general in nature and you should always seek professional advice from expert advisers about your individual situation before making significant financial decisions.