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By the time you retire, you have probably collected a considerable amount of home equity and downsizing can be a way to tap into that valuable cash.

Downsize your lifestyle – not your life

When your kids left home you probably had big plans for those unoccupied bedrooms – like the art studio you’ve always wanted, a sewing room or a playroom for the grandkids. But it’s a fair bet those rooms have barely changed and now you may be wondering if you really need all the extra space.

Downsizing can be a way to harness the home equity you have built up. But it’s a big decision and you need to be sure it is the right choice that helps you scale back your life without scaling back your lifestyle.

Let’s look at some factors to consider.

1 Where would you like to move to?

When you’re not in the workforce, your choice of location is no longer dictated by proximity to work. You’re free to explore a change of scenery, which opens exciting possibilities, although you may want to remain close to family or friends. So a long distance relocation is something to think through carefully. If you’re heading off to a new location, investigate whether the area has clubs and organisations to help you make new friends and become part of the community.

2 What sort of property are you looking for?

Look for something that suits you now and in the future. Some of the factors you may want to look at are the ease of maintenance of the property, how many stairs it features and whether doorways are wide enough to accommodate aids such as a walking frame. Single level living is often a plus for seniors.

3 Does it stack up financially?

Downsizing can seem like a great way to free up extra cash. But you will need to pay for a new home and this brings a range of buying and selling costs which can eat into the sale proceeds of your current home.

There are ongoing costs to consider too. Moving from a house into an apartment can mean a lower maintenance style of living. Be sure to look into strata levies though. The more facilities an apartment complex offers, the higher the levies you are likely to face. Similarly, retirement villages can be a great place to socialise and feel part of a community. But often have monthly fees that you will need to account for.

4 Have you considered your emotional needs?

There’s a lot of family history tied up in our homes and you shouldn’t discount the emotional attachment to your place. Think through the decision to move very carefully and discuss it with your family. The last thing you need is to make a decision you’ll regret.

Investing the proceeds from the sale of your property

Recent Government changes now allow people over 65 to make contributions to superannuation (called ‘downsizer contributions’) from the proceeds of selling a main residence, up to $300,000.

Key Features of this strategy include:

  • Contracts for sale of main resident must exchange on or after 1 July 2018.
  • You must be aged 65 or over at the time of contribution.
  • Contribution must be sourced from proceeds of one qualifying main residence.
  • Ownership of main residence must have been for at least 10 years prior to sale.
  • Contribution must be within 90 days of settlement.

For couples, each person can contribute up to $300,000, however total contribution cannot exceed the total proceeds of the qualifying residence sale.

For example, Elizabeth and Philip sell their home for $550,000. If Elizabeth makes a downsizer contribution of $300,000, Philip is limited to a contribution of $250,000 (that is, $300,000 plus $250,000 equaling the sale proceeds of $550,000).

Potential social security and aged care impacts

Downsizing your primary residence or making downsizer contributions to superannuation may potentially lead to decreases in Social Security benefits or increased aged care fees.

Social Security

For Social Security purposes, your primary residence is an exempt asset, regardless of value.

So, a downsizer contribution to superannuation will convert an exempt asset, to one that is asset and income tested when determining Age Pension entitlements.  So, depending on a person’s personal situation, having more money in superannuation (or held in cash for that matter), may reduce social security benefits.

Aged Care

A person’s aged care costs are impacted by their ‘means tested amount’ which can impact this initial entry contribution as well as their ongoing ‘means tested care fee’ when entering residential aged care.

For aged care testing, the former home is generally assessed at a capped rate of $159,631, unless a ‘protected person’ lives in the home (in which case, the house is exempt). As a result of a downsizer contribution, a person would effectively convert a largely exempt asset, to being a means tested amount, which could lead to higher care costs.

In addition, when someone enters aged care, their former home is exempt under social security asset test for up to two years. By selling the former home, the person will be assessed as a non-homeowner (for Age Pension purposes) and the proceeds of sale will now be assessed. This could potentially decrease age pension entitlements.

So, depending on your personal situation, having more money available to you from downsizing (whether in superannuation or not), rather than a main residence, may increase ongoing costs of aged care and potentially reduce social security entitlements. However, understanding the impacts will help you make a more informed decision that is best for you and your family and highlights why getting financial advice around aged care is important.

Disclaimer

Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.

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Justin Cilmi
Justin joined the financial planning industry in 2001 and is committed to providing practical and effective solutions for his clients. As a financial adviser, Justin has provided advice to clients across a wide range of areas, including wealth creation, wealth protection and personal insurance, redundancy, retirement and Centrelink and Aged Care planning. Justin’s qualifications include a  Bachelor of Commerce (Majoring in Finance and Economics), a Graduate Certificate in Applied Finance, an Advanced Diploma of Financial Planning and holds a specialist accreditation in Self Managed Superannuation Funds. Justin is also a member of the Financial Planning Association of Australia, holding a Financial Planner AFP® accreditation.