If you’re thinking of selling your home for something smaller in retirement, it’s important to understand the potential implications for downsizing and your pension. The government provides financial incentives for downsizers aged over 55, including Age Pension assets test exemptions.
The Age Pension assets test
The Age Pension assets test is one of two tests you must pass to receive either a full or part Age Pension once you reach your Age Pension eligibility age (which will become 67 for all Australians from 1 July 2023). The other test you need to pass is the Age Pension income test. (More on that in the next section.)
The value of your assets needs to fall within Age Pension assets test thresholds for you to pass the test. It’s important to understand that the value of your residential home is NOT included in the Age Pension assets test.
However, you might be wondering about the excess proceeds of the sale of your home if you downsize to a cheaper one. For example, if you downsize from a $1 million home to a $700,000 one, is the $300,000 surplus counted in your assets?
The good news is that there is an exemption from including the proceeds of the sale of your home in the Age Pension assets test for up to two years. Therefore, if you sold your home in June 2023, the $300,000 surplus would not be included in your Age Pension assets test until June 2025.
However, it’s important to understand that ‘deemed earnings’ on these proceeds would be included in the Age Pension income test. Let’s look at that test in more detail.
The Age Pension income test
Your fortnightly income needs to fall within Age Pension income test thresholds for you to pass the test. While the proceeds of the sale of your residential home are not included in the Age Pension assets test for two years from the date of sale, you will be deemed to be earning income from these proceeds for the purposes of the Age Pension income test, whether you are or not.
For example, if you downsize from a $1 million home to a $700,000 one, you will be deemed to be earning the current deeming rate on the $300,000 excess. Deeming rates vary depending on whether you are single or not, and whether you and/or your partner currently get the Age Pension or not. Rates are usually reviewed at least once every financial year to reflect current market rates.
So there is no point putting the $300,000 under a mattress to avoid the Age Pension income test, as it will be assumed to be earning income for you anyway!
However, any income earned above the deeming rate is NOT included in the Age Pension income rate. It therefore makes sense to try and get the best return on it that you can. One option is to put up to $300,000 into your super as a downsizer contribution.
When do you have to notify Services Australia about downsizing?
If you currently receive a full or part Age Pension, then you must let Services Australia know of any change in your living or financial arrangements (including selling your residential home and/or downsizing) within 14 days of the change happening.
They will conduct fresh Age Pension assets and income tests to ensure that you are paid the correct Age Pension rate based on your specific circumstances.
Want to learn more about making the most of your next 30 years?
Retirement living can be the best time of your life.
We’re committed to making life better for the over 55s. Check out downsizing.com.au for more insights and great advice on living life to the fullest. We have a great range of properties for the over 55s to help you do that with like-minded people in land lease communities and retirement villages.
