How to upsize your super by downsizing

For so many Aussies, the great Australian dream is to have a place to call their own. Our home is by far the biggest investment most of us will ever make.

It is tough for young people hoping to enter the market with the record pricing, but it is great news for retirees who have scrimped and saved for years to put a roof over their head.

Upsize your super and downsize your home

If you’re unhappy with the amount you have to spend in retirement, selling your house, buying a less expensive property and using the cash to boost your super balance (and thus your income), makes good sense.

You can make a downsizer contribution up to a maximum of $300,000 (each spouse), but the contribution amount can’t be greater than the total proceeds from the sale of your home.

Something to consider though, is while this will increase the amount of income you can draw down from super, it may decrease or even remove your eligibility for the Age Pension.

This is an important consideration, so we’ve set out the key points that will help you get a feel for whether downsizing should feature in your retirement income plans.

The Age Pension

 
To get the pension, firstly you need to be old enough. At the moment, 67 years or older. You can check your circumstances at Services Australia Who Can Get The Age Pension.
 

There are also limits to how much wealth you can have and get the pension. Everything that you earn and own goes under the microscope when you claim the Age Pension.

However, your ‘principal place of residence’ isn’t taken into account for pension eligibility purposes. It doesn’t matter what value it is ie $500,000 or $5,000,000 … it won’t impact your pension entitlement.

Sometimes, people take advantage of this loophole and upsize; in other words, they buy a more expensive home in retirement to reduce their financial assets in order to maximise their pension entitlement.

Downsizing is far more common however. But there can be a trap. If you sell one home and buy a less expensive one, even if you’re using the new ‘downsizing’ superannuation rules, the money left over after you’ve purchased a new property becomes assessable.

As an example, let’s take a retiree who sells the family home for $1,000,000, buys a smaller property for $750,000 and makes a $250,000 super contribution for example. The $250,000 paid into super becomes assessable under both income and assets tests.

The income test

When you claim the Age Pension, your entitlement is assessed under both the income test and the assets test. The one that calculates the lowest rate of pension is the one that’s used.

With the income test, all of your sources of income are added up, including ‘deemed income’ from financial investments like shares, bank accounts and account-based pensions.

Deeming is a set of rules used to work out the income created from your financial assets. It assumes these assets earn a set rate of income, no matter what they really earn.

If you’re single, the first $62,600 of your financial assets has the deemed rate of 0.25% applied. Anything over $62,600 is deemed to earn 2.25%.

If you’re a member of a couple and at least one of you get a pension, the first $103,800 of your combined financial assets has the deemed rate of 0.25% applied. Anything over $103,800 is deemed to earn 2.25%.

If you’re a member of a couple and neither of you get a pension, the first $51,900 of each of your own and your share of joint financial assets has a deemed income of 0.25% per year. Anything over $51,900 is deemed to earn 2.25%.

If your investment return is higher than the deemed rates, the extra amount doesn’t count as your income.

The Minister for Social Services sets these rates. They reflect expert advice about what the markets are doing.

If you’re looking at downsizing, though, it’s the assets test that you need to take a closer look at.

The assets test

Your home isn’t counted in the assets test, but everything else is, including your furniture!  A quirk though is that household contents are assessed at market value, not replacement cost.

When your assets are more than the limit for your situation, your pension will reduce.

What the limits are for a full pension

If you’re a member of a couple, the limit is for both your and your partner’s assets combined, not each of you.

Your situation Homeowner Non-homeowner
Single $314,000 $566,000
A couple, combined $470,000 $722,000
A couple, separated due to illness, combined $470,000 $722,000
A couple, one partner eligible, combined $470,000 $722,000
 

What the limits are for a part pension

From 1 July 2024, part pensions cancel when your assets are over the cut off point for your situation.

If you’re a member of a couple, the limit is for both your and your partner’s assets combined, not each of you.

Your situation Homeowner Non-homeowner
Single $686,250 $938,250
A couple, combined $1,031,000 $1,283,000
A couple, separated due to illness, combined $1,214,500 $1,466,500
A couple, one partner eligible, combined $1,031,000 $1,283,000


It’s tricky!

If it sounds tricky, it is because it is!  There are a few restrictions on who qualifies to use the downsize to super rule incuding:

  • You have to meet the requirements of being at least age 67
  • You must have owned the property for at least 10 years, thus qualifying the property for some exemption from capital gains tax.

Being over 67, normally you’d have to meet the work test in order to contribute to super but in this instance, you don’t. It also doesn’t matter how much money you’ve already got inside super, you’re still eligible to contribute up to $300,000.

Legislation governing Australia’s retirement income system runs to thousands of pages and the rules change reasonably regularly.

What we’ve tried to do here is not make you an instant expert, but to show that although downsizing can be a great way to top up your retirement income, you need to tread carefully when it comes to the impact on Age Pension.

To book a complimentary ten minute phone consultation with Cameron Teague our Certified Financial Planner, about your retirement plans, click on the link below.
 
That way you can make the best decision for you about upsizing, downsizing or staying right where you are.