While the recent Budget changes designed to encourage retirees to tax-effectively downsize from their family home are welcome, they may leave some retirees worse off financially, says Jonathan Philpot, wealth management partner at HLB Mann Judd Sydney.
“This strategy may not suit everyone and people should fully investigate the implications it may have on areas such as the age pension before taking action.
“The government has proposed that retirees will be able to put an extra $300,000 into super from the proceeds of selling their family home after they turn 65. For a couple, it means being able to contribute a further $600,000 to their super.
“Overall, it is a positive move for many people who are over 65 and no longer able to contribute any more into super.
“This could include those who do not pass the work test (this would be the majority) or who have total super balance above $1.6 million (this would be the minority). A couple with accumulated assets outside of their home of greater than $821,000, or a single person with more than $546,000, may benefit from these changes.
“However, selling down the home and placing the proceeds into super may not be the best strategy for everyone.
“This is because the family home is exempt from the assets test for the age pension, but super is included in the assets test.
“With the new assets test taper rate of $3.00 a fortnight for every $1,000 of assets, this works out as a reduction in pension payments of $78 in pension payments for every $1,000 now included in the assets test.”
Mr Philpot uses the example of a couple who own their own home and currently have $500,000 in assets that count towards the age pension. If they were to sell down their home and increase their super by a further $300,000, this would reduce their age pension by $23,400 a year (that is 300 x $78).
“This means they have to invest the $300,000 and produce an after-tax return of greater than 7.8 percent a year in order to be ahead of the current position – not an easy task in today’s environment,” says Mr Philpot.
“In my view, it is unlikely that these changes will be the driving factor into downsizing. Lifestyle factors nearly always head the list, such as being closer to family or the home just being too big to look after.
“However those who already have assets well above the assets test threshold would benefit from this type of change as it allows them to further increase their wealth in super,” Mr Philpot said.