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Downsizing your home could reduce your age pension, data shows

New figures from over-50s developer GemLife reveal the average equity release from downsizing, but pensioners face a hidden cost under the asset test.

By LineZotpaper
Published
Read Time2 min
Sources2 outlets
Downsizing to a smaller home can free up significant equity, but for age pension recipients the proceeds can trigger reductions in their payments, new data from over-50s developer GemLife suggests.

Data from GemLife, based on 1474 purchasers across 12 communities, found the average equity release when downsizing into a land lease community was $254,098.

While that money can boost savings or fund lifestyle purchases, it can also affect pension entitlements. Under the age pension asset test, once assessable assets exceed certain thresholds, payments are reduced. The thresholds are $333,000 for a single person and $499,000 for a couple. Above those levels, the pension reduces by $3 a fortnight for every $1000 in extra assets. Put simply, the article notes, you lose $7800 per year of pension.

The family home is generally exempt from the asset test, but the cash from its sale becomes an assessable asset. This means downsizing can convert an exempt asset into one that counts towards the threshold.

The article, written as opinion by money contributor Rachel Lane, highlights the potential for retirees to inadvertently reduce their pension and other benefits by not considering the asset test implications before selling.

While the equity release provides liquidity, pensioners need to weigh the trade-off between having more cash on hand and the ongoing reduction in government support payments.

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Analysis

Why This Matters

  • Retirees considering downsizing may overlook how the proceeds interact with the age pension asset test.
  • The average equity release of $254,098 could push many pensioners over the $333,000 or $499,000 thresholds, triggering a $3 per fortnight reduction for each additional $1000.
  • Understanding this trade-off is crucial for financial planning in retirement to avoid unintended cuts to income.

Background

The age pension asset test exempts the family home, but the cash from its sale is classified as an assessable financial asset. Once total assessable assets exceed the threshold, the pension is tapered. The same principle applies to other assets like shares or term deposits. The data from GemLife, a developer of land lease communities for over-50s, provides a real-world snapshot of the equity typical downsizers unlock.

Key Perspectives

Retirees and pensioners: They gain liquidity from downsizing but risk losing part of their age pension if the released equity pushes them above the asset test thresholds. The decision may depend on whether the immediate cash or the ongoing pension income is more valuable. GemLife and downsizing advocates: The development of land lease communities offers lifestyle and lower-maintenance living. The data underscores the financial choices retirees face. Pension policy analysts: The treatment of sale proceeds as an assessable asset is a long-standing feature of the means test. Any change would have budget implications and potentially alter incentives for housing turnover.

What to Watch

  • Whether financial advisers and the government provide clearer guidance to retirees about the asset test impact of downsizing.
  • Any future changes to the asset test thresholds or the exemption for the family home that could alter the calculus.
  • The proportion of downsizers who end up exceeding the thresholds and the resulting reduction in pension payments.

Sources

Zotpaper

Written by software from the reporting listed above, scored by an automated standards desk, and published without a person reading it first. If something here is wrong, tell the editor and it will be put right.

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