Hazards of downsizing in retirement
From July 1 this year, Australians aged 65 or more will be able to deposit up to $300,000 of the proceeds from selling the family home owned for 10 years or longer into superannuation. For a couple who both qualify to contribute, the maximum additional super contribution possible is $600,000.
Unlike other superannuation contributions, there are no strings attached such as complying with the work test or not exceeding the new $1.6 million individual total balance cap. For people 65 and over who have already made the decision to downsize, this new option has considerable attractions.
For them, the biggest trap is the date: July 1, 2018. The contract for sale cannot be exchanged before then to qualify under the legislation. Tax laws define the date of sale as being when contracts are exchanged, not the settlement date.
Apart from this constraint, the legislation provides a tax effective way of investing surplus proceeds from downsizing.
It does not, however, assist with obtaining or retaining an age pension entitlement because the surplus funds are subject to the age pension assets test. As well, new money invested in super no longer receives favourable age pension income test treatment.
The clear message is that where obtaining or retaining an age pension is relevant, it's vital to consider the social security implications of owning a less valuable or no family home and having more investment assets.
Once the modest asset test threshold is passed, every $100,000 generated by selling the family home reduces age pension entitlement by $7800 a year. While investing the money in superannuation may help reduce ongoing tax bills, it won't compensate for losing age pension entitlement at such a high rate.
After age 65, the option of disposing of assets by large gifts to family members won't help retain existing age pension entitlements because Centrelink rules still consider these gifts above small limits as assets for a five-year period.
The toughening of the assets test in 2017 has thus reduced the benefits of obtaining cash from downsizing or selling the age pension assets test exempt family home.
Hardest hit have been those pensioners forced to sell their family home for personal reasons. Taking out a reverse mortgage especially at older ages to help fund living expenses can now be more attractive than freeing up cash by selling the family home.
Receiving a larger age pension while owning the family home will outweigh the interest cost of the reverse mortgage. The accrued debt can be repaid from the proceeds when the house is sold.
In summary, the possible adverse social security consequences of downsizing need to be considered by retirees tempted to downsize by being allowed to invest more in superannuation.