Downsizing to top up super could leave you worse off

Downsizing and putting the extra funds into super may not leave you better off

If you are weighing up the federal government's new downsizer incentive, to start on July 1, take care. The new measure encourages people aged over 65 to sell their home and park $300,000 each, or $600,000 for a couple, in their superannuation fund.

It looks like a great way to boost low super balances, particularly as there are now strict limits on how much you can put into your fund, with caps of $25,000 for concessional (before-tax) contributions and $100,000 for non-concessional amounts.

But for the 80% of retirees who fund their retirement years with a combination of superannuation and the age pension, it is important to assess the impact of downsizing on their pension eligibility, as the extra money will be counted in the assets and income test.

Retirees will certainly get more money to spend. But in many cases they will lose part or all of their age pension. The government tightened the assets rules last year and the eligibility for the age pension tapers off quite sharply for homeowning couples with a super balance between $380,500 and $830,000 and for singles with a balance between $253,750 and $552,000.

"For many people it is not worthwhile to take money out of the home and be assessed under the age pension and assets test," says Jonathan Philpot, financial planner with HLB Mann Judd.

The problem is that you lose $3 a fortnight ($78 a year) of the age pension for every $1000 above the threshold. It was $1.50 a fortnight before the changes. This means that for every $1000 you would need to make a return of 7.8%pa to compensate. "Getting 7.8% is quite a difficult hurdle rate to get over in the current low-return environment," says Philpot. "It is quite steep."

There is a no man's land where your ability to access the age pension plunges and your superannuation income is not high enough to replace it.

Our experts - Louise Biti from Aged Care Steps, HLB Mann Judd's Philpot and Craig Day from Colonial First State - look at three different downsizing case studies:

• Jack relies on the age pension, with only $100,000 in super and a house worth $800,000. 
• Monty and Mavis have $500,000 in super and a house worth $1.3 million. 
• Ben and Bridget aren't concerned about the age pension as they don't qualify because they hold more than $1.6 million in super.

What are the advantages of selling their family home and putting $600,000 into their accumulation fund, or is there somewhere better to put the money to boost their wealth in retirement?

It is important to consider that if you stay in your home you may qualify for a bigger age pension.

You can still sell your home and move at a later date. Or if you do decide to downsize and put the money into super, then draw down on it heavily, you will be eligible for the age pension again when you reach the right assets threshold.

Lifestyle decision

With house prices reaching an average asking price of $973,500 in capital cities, or $584,600 for units, according to SQM, the home is the biggest asset for most people, outstripping superannuation.

But selling the family home is an emotional decision with wide financial implications.

Biti says it is important for retirees to work out their motivation for selling and moving. Do they want to have a better lifestyle and spend more money? What sort of lifestyle do they want?

In her experience, Biti says retirees are often too caught up in thinking that the house is an inheritance for their kids.

"I don't think people are going to race out and sell their home so that they can put more into super," she says. "However, the new rules may spark the conversation that it doesn't make sense to live in a big house with no money."

Often the decision to sell and move isn't a financial one but is based on how the house doesn't work for them as it once did.

Typically the grown-up children have moved out and the large, empty family home and garden have become too much work to maintain. Or stairs can be hard to navigate in old age. Accidents can trigger decisions to move.

Biti says moving is always stressful and always expensive. Often the prospect of de-cluttering, packing and moving is overwhelming.

Philpot says he has found that few people successfully downsize. "They often move to a better suburb or decide to go for more luxury. They really don't pull a lot of equity out of their home. It has to be done carefully," he says.

What do retirees need to consider to make downsizing to a smaller, less expensive home work out?

High transfer costs

One of the big stumbling blocks to moving is how expensive it is to sell. There are plenty of costs: sprucing up your home, stamp duty, removalists, agents and lawyers.

Then there is the temptation to upgrade the furniture as it doesn't look right in the new place and to rip up the carpets.

"It is a time when people spend a whole lot of money," says Philpot.

You can expect to pay 5% to 6% of the value of your property.

This means for a property worth around $1 million, transfer costs will be $50,000 to $60,000. That can buy a lot of maintenance and modifications to your original home.

Will you make money?

If you want to live in the same area, smaller properties aren't always cheaper.

"Sometimes when you buy and sell, you may buy something smaller but it can be more expensive," points out Biti, whose company, Aged Care Steps, provides aged care support to advice experts such as financial planners, accountants and lawyers.

She says retirees often want a property with level access or a lift. Comfort is a high priority and this can mean newer and better facilities that are more expensive. "People often don't release much equity," she says.

However, if you downsize from the city to a lower priced regional or coastal area, there is the opportunity to buy a cheaper home.

Emotional price

Moving to a cheaper place can be lonely if you leave behind your social network. Not surprisingly, people have a significant emotional attachment to their home and community.

It is always a good idea to rent out your home and live in your potential retirement location to see if you like it and if it has good facilities such as medical and community services.

Timing the property market can be tricky: if you sell up and later change your mind you could be caught out and be unable to buy back into your old area.

Consider aged care

There is no point in going through the stress of downsizing and then a few years later moving into aged care. Work out if moving into aged care is appropriate for you and when you may do this.

Case studies

By Craig Day, executive manager, FirstTech, Colonial First State

Jack

Jack is single with $100,000 in super and a house worth $800,000. Ignoring the value of his car and home contents, Jack would be entitled to an annual age pension of $23,254.

After selling his home and purchasing a $500,000 unit, he has $300,000 to put into super as a downsizer contribution.

Jack's assessable assets have increased by $300,000 to $400,000 and therefore his annual pension entitlement has dropped from $23,254 to $11,847. If he starts an account-based pension, which would pay an annual minimum of 5% or $20,000, this would more than make up for the $11,407 reduced pension entitlement.

"This could be a good outcome for him where he needs more. He just needs to be aware that he is now drawing on his own savings to fund part of his retirement," says Craig Day, executive manager, FirstTech, Colonial First State.

He says Jack wouldn't get a tax benefit from contributing to super.

If he invests the money outside super, assuming a 5% rate of return, the income would be less than Jack's effective tax-free threshold of $32,279 (from the general tax-free threshold of $18,200, the low-income tax offset and the seniors and pensioners tax offset).

"By investing in super, Jack could invest part of the proceeds in a financial product designed to provide retirement income and would result in him not needing to lodge a tax return every year where he had no other assessable income," says Day.

As Jack spends his super, he will be able to increase his age pension.

Monty and Mavis

Monty and Mavis are over 65 with $500,000 in super and a house worth $1.3 million. They receive an age pension of $25,737 combined. The couple sell their house and buy a $900,000 apartment. They each make downsizer contributions of $200,000.

Their assessable assets would increase from $500,000 to $900,000, which exceeds the current assets test cut-off threshold of $830,000. As a result they cease to qualify for any age pension and lose the pensioner concession card.

"The loss of the pensioner concession card can be a big blow," says Day.

Monty and Mavis wouldn't get any tax benefit from contributing the proceeds to super and commencing an account-based pension, as assuming a 5% rate of return the income they would receive from investing the $400,000 outside super would be less than their effective tax-free threshold of $28,974 (each), taking into account the general tax-free threshold, the low-income tax offset and the seniors and pensioners tax offset.

"I can't see a lot of benefit for them to downsize and put the money into super," says HLB Mann Judd's Jonathan Philpot. "They need to generate 7.8% on their investments. It is not an attractive scenario and they need to be really careful about the impact on their age pension."

Ben and Bridget

Self-funded retirees Ben and Bridget aren't on the age pension and own a four-bedroom house worth $1 million, plus a residential investment property worth $1 million generating net rent of $40,000pa (4%).

They have other non-super investments of $1.5 million generating net income of $75,000 (5%).

Their superannuation fund's account-based pension of $800,000 generates tax-free income of $40,000.

They sell their home and purchase a two-bedroom apartment with lifts and views for $1 million.

They make $300,000 downsizer contributions from non-super investments and commence a second account-based pension - the investment income and pension payments are tax free.

Their assessable income is reduced by $12,000, which results in a tax saving of $4680 (based on a 39% rate).

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