Please note: The information in this article is general in nature. Everyone’s individual financial circumstances and needs are different. You should seek independent financial and legal advice.
Whether you’re a self-funded retiree, on a part pension or on a full Australian aged pension, the decision to downsize from the family home has very important implications for your government benefits and entitlements.
Changes that came into effect from 1 January, 2023 by the Australian Government have been designed to encourage older Australians to downsize their homes to free up housing stock for younger families.
So, what does this mean for self-funded retirees and pensioners downsizing? In this article, we take a deep dive to answer some of your questions.
What Does Downsizing Mean For Your Pension?
The recent changes announced by the Department of Social Services is great news for older Australians looking to downsize family-sized homes for ones that are more rightsized.
The changes include:
- The asset test exemption following the sale of your primary place of residence is extended from 12 months to 24 months
- The deeming rate on the exempt proceeds uses the lower rate of 0.25 percent
And, if you’ve owned your current home for more than ten years, there has been another recent legislative change may benefit both pensioners and self-funded retirees.
The Australian Tax Office now permits individuals to contribute up to $300,000 (and up to $600,000 for couples) from the proceeds of the sale of their home into their superannuation.
This, of course, can have an impact on how you decide to manage your finances, particularly if you are planning on claiming the pension.
First of all, are you eligible for the Australian aged pension? Understanding the ever-changing pension rules can be a challenge.
According to Services Australia, from 1 July 2023, if you were born on or after 1 January 1957, you have to be aged 67 years to be eligible for the aged pension as well as met certain other criteria regarding assets and income.
Your Assets and Income
The government assesses your eligibility against all assets and income for yourself and your partner as a couple, including:
- Financial investments
- Home contents, personal effects and vehicles
- Real estate, annuities, income streams and superannuation pensions
- Businesses and private trusts
The home you live in, is not included in the asset test.
And that begs the question:
Will Selling Your Home Affect Your Pension?
As with anything to do with government and government services, the answer to the question is ‘perhaps’, and very much dependent on your individual circumstances.
The Federal Government’s rule changes that came into force on 1 January 2023 mean you have up to 24-months to purchase a new home before its proceeds are considered assets that will affect your pension rate. This can be extended to 36 months in exceptional circumstances.
Furthermore, the proceeds from the sale of the home are deemed at a lower rate for calculating your pension.
What is Deeming?
Rules the Federal Government uses to work out the income created from your financial assets is called ‘deeming’.
This covers everything from money in the bank, shares you own, and certain other types of income. There are two deeming rate tiers. The first is 0.25 percent and the second is 2.25 percent. They apply in different ways dependent on whether you are single or a couple, whether one of you is receiving a pension or if neither of you are on the pension.
What About Centrelink Downsizing Rules?
The recently implemented downsizing rules are an attempt to make it easy for older Australians to sell their larger, family-sized homes while reducing the financial implications for doing so.
As we mentioned earlier in this article, the new rules provide more breathing space following the sale of your home, before you need to commit to a new one.
The deeming rate on the income from the sale is also assessed at the lower rate.
The next question is determining how best to manage the balance left over between the sale of your family home and the purchase of your new rightsized home.
Here, the Federal Government has introduced the Downsizer Superannuation Contribution Program.
What is the Downsizer Superannuation Contribution Program?
The Downsizer Superannuation Contribution Program allows Australians over the age of 55 who plan to downsize, to put up to $600,000 (for a couple; $300,000 for individuals) into their superannuation account.
The program isn’t new, but the rule which has recently changed is the lower age at which one can access the scheme. Prior to 1 January 2023, only people over the age of 65 could use the program.
Another thing to note is that the Downsizer Superannuation Contribution Program has no upper age limit. This is important because once you reach the age of 75 you are ineligible to make further superannuation contributions – regardless of whether you’re still working.
At this point, it is important to speak to a professional financial advisor who will be able to give you information and advice tailored to your specific circumstances and goals for retirement.
What About Stamp Duty?
Stamp duty is the state tax you pay when purchasing a home. While some states offer incentives for those who are downsizing, these are not consistent across all states. Queensland and South Australia, for instance, offer no stamp duty incentive.
However, there is a way to purchase a brand-new home and not pay stamp duty, no matter which state you live in.
Land lease community over 50s lifestyle resorts give you the opportunity to purchase a new home and lease the land that it is on, which means you don’t pay stamp duty. We’ll be talking more about the advantage of choosing a land lease community over a retirement village later in this article.
What Else Do Pensioners Need to Consider When Downsizing in Retirement?
Once you have your head around the finances and have decided that downsizing makes economic sense, the next step is to consider where to downsize.
This is more than working out whether a seachange or a tree change is right for you.
Unfortunately, sorting through the different types of retirement living options can be as confusing as wading through Department of Social Security and Australian Tax Office rules.
Unlike land lease over 50s lifestyle communities, traditional retirement villages come with a set of fees and charges including entry and exit fees, deferred management fees and capital gains fees. It is important that you understand what those fees are, and how they can impact on your retirement lifestyle plans.
Retirement Villages vs. Lifestyle Resorts
The complexity of contracts and the hidden fees found in retirement villages are not the only differences.
Depending on the type of retirement village, you may be obliged to be fully retired as well as experience restrictions on pets as well as how and when you are allowed to entertain guests or have the grandchildren spend the weekend.
Lifestyle resorts better suit active over 50s who are using downsizing the family home as an opportunity to boost their retirement income with the benefit upgrading their lifestyle.
Living & Lifestyle Costs
Planning your retirement requires a lot of planning while you look for ways to maximise your future income and lifestyle.
At GemLife, once you have purchased your home, the only other cost, apart from your day-to-day living expenses, is a modest weekly site fee which covers the cost of rent of the land and maintenance of the resort.
This means you have confidence to budget to suit your lifestyle and do more of the things you prefer to do.
GemLife homes have also been built with cost-saving sustainability in mind with energy efficient appliances and an Australian industry leading energy program. The Virtual Power Plant system reduces electricity costs to virtually zero.
With great resort facilities at your doorstop, you can say farewell to gym and sports club fees. An evening out – drinks with friends, a friendly game of ten–pin bowls or your own gold class cinema experience – without ever having to leave the resort, is yours.
Downsize to a Lifestyle Resort Like GemLife
Deciding it’s the right time to downsize is a big life decision. Luckily, the team at GemLife makes downsizing easy when it’s time to start the next chapter.
GemLife carefully selects each resort location to ensure our residents experience the best of over 50s living to help kick start their next chapter.
With state-of-the art amenities, facilities and homes, GemLife provides the perfect lifestyle for those looking to ‘rightsize’.