Selling your home to boost super? What it means for your Age Pension

Selling a home can be a good way to free up some cash to top up your super and create additional retirement income. But what about the impact on your Age Pension entitlements?

The downsizer super contribution, available when you’re 55 or older, means you can invest up to $300,000 (or $600,000 for a couple) into super that doesn’t count towards the usual contribution caps. What’s more, it’s the only type of contribution that can be added to super beyond age 75 when the opportunity to make other personal contributions ends.

To use this measure, the property being sold must be fully or partially exempt from capital gains tax using the main residence exemption and you or your spouse must have owned it for 10 years or more.

It sounds attractive, but if you (or your partner) are receiving the Age Pension or another income support payment, converting your means-test-exempt home into an assessable investment could reduce your entitlements.

Whether your payments reduce and if the effect on your benefits is worthwhile to improve your overall income depends on your full personal situation. There’s a lot to consider, so we’ve put together some examples to demonstrate some of the possibilities.

Single moving in with family

Roberto is single, aged 77, and owns the villa he lives in, which is worth $500,000. Roberto tops up his $30,646 annual Age Pension (the full rate) with $10,000 a year drawn from his account-based superannuation pension. He is concerned that his small super balance of $70,000 is running out and he won’t be able to support himself without it. His only other assets are $10,000 in home contents and a $10,000 car.

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Roberto’s brother, Sal, lives nearby in his own home and the two are considering moving in together. Sal’s place is bigger so Roberto wonders what his position might be if he sold his home and moved in with his brother.

After selling costs, Roberto estimates he would have around $485,000 to invest to generate more retirement income. Sal will charge him $200 a week rent.

In this scenario, Roberto will no longer be a homeowner for Centrelink means-testing purposes. This increases the amount of assets allowed before the Age Pension starts to reduce and provides access to rent assistance.

Topping up super

If Roberto transfers the balance of his account-based pension back into a super accumulation account, he can add another $300,000 with a downsizer contribution, then use the total of $370,000 to start a new account-based pension. He will need to draw a minimum payment of approximately $1,850 a month in the first financial year.

He’ll have $185,000 left over that he can invest outside super and use for any one-off expenses like a new car or holidays. This extra amount can’t be added to super because personal super contributions are not permitted for people aged 75+. Only the downsizer contribution is available.

Roberto’s total assessable assets will be $575,000 ($485,000 from home sale, plus $70,000 existing super, plus $20,000 home contents and car). This is below the $579,500 limit for a single non-homeowner to receive the full rate of Age Pension. However, his $555,000 of financial investments will generate enough deemed income to reduce his Age Pension by $4,155 a year to an annual payment of $26,491. He will receive rent assistance of $141.33 a fortnight (approximately $3,675 a year).

New income position

If Roberto goes ahead with his plan, his new income will be:

$26,491 Age Pension

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+ $22,200 minimum super pension withdrawal

+ $3,675 rent assistance

+ $7,400 interest on bank savings (at a rate of 4%)

= $59,766 in the first year

His total income is $19,120 more than before selling the home, but he’ll pay $10,400 a year in rent to Sal, leaving an additional amount available for spending of $8,720.

Because the super income and rent assistance are tax free and Roberto is eligible for the seniors and pensioners tax offset (SAPTO) and low-income tax offset (LITO), he will not pay any income tax.

Roberto’s results

By selling his property to invest in super, Roberto has secured a more comfortable income and bank savings he can draw on for emergencies. According to the ASIC Moneysmart account-based pension calculator, his account-based pension balance is likely to remain above $200,000 when he turns 90 if he chooses a balanced investment option. He no longer worries about running out of savings and being forced to live on the Age Pension with no additional income.

Although his Age Pension will be lower at first, it is likely to rise back to the full rate as the value of his financial investments reduces over time.

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The trade off is that Roberto no longer owns a property to pass on to any beneficiaries after he passes away.

Couple downsizing

Peter and Jean are 68 and recently retired. They have $350,000 each in super and own their home worth $1.3 million. They are considering selling their large home to purchase a small ground-floor apartment in a walkable suburb for approximately $800,000.

After retiring, both Peter and Jean withdrew their entire super balances in cash and made non-concessional contributions. This recontribution strategy converted their savings into a tax-free component in super, with the aim of reducing tax for their adult children if they later inherit the amount.

Because Peter and Jean have already contributed $350,000 each this financial year, they have only $10,000 remaining available under the non-concessional cap to make further contributions before 1 July 2028 using the bring-forward rule.

However, if they proceed to sell their home, the downsizer contribution will allow them to add up to $300,000 each from the sale to super that will not be counted towards the cap.

Current position

With their current assets of $700,000 in super and $20,000 home contents plus their car, Peter and Jean receive a combined total of $27,600 from the Age Pension.

If their super balances are used to start simple account-based pensions, they will need to withdraw approximately $35,000 a year to meet the minimum withdrawal for their age.

The combination of a minimum account-based pension and their part Age Pensions is a total of $62,600 a year. Peter and Jean would prefer a more comfortable lifestyle than the minimum will provide, aiming for approximately $75,000 a year. The TelstraSuper retirement lifestyle planner indicates this income level would be sustainable, with estimates showing the couple’s super balances would likely last until age 99 with a balanced investment option.

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Selling the home

After their new home’s purchase price, stamp duty, estate agent fees, and moving and conveyancing costs, Peter and Jean expect to have $400,000 remaining from the sale of their home to invest in super.

This additional $400,000 lifts their combined total super balance from $700,000 to $1.1 million. This is above the current assets test limit of $1,074,000 to receive the Age Pension. The couple consider investing some of their super in lifetime pensions to improve their Centrelink assessment so they can continue to receive some Age Pension, but ultimately decide it is not for them. They would rather have all their super in simple account-based pensions where they can change their annual payments to suit their needs and withdraw lump sums at will.

If Peter and Jean proceed with their sale, they will lose the Age Pension entirely until their assets reduce below the threshold. The amount of Age Pension payable is then likely to slowly increase over time as the threshold rises and super balances gradually reduce.

The couple would rather not trade $27,600 of Age Pension away, so they choose to remain in their current home.

They have the option to sell their home at any time in the future and make downsizer contributions then, when it could make more financial sense.

Couple selling their second property

Suzanne and Bill (both aged 76) have retired to what was previously their coastal holiday home. They still own the city apartment they lived in prior to retirement, which is worth $600,000.

As former business owners, the couple did not prioritise making super contributions while they were working and have modest balances of $100,000 each.

Suzanne and Bill receive an Age Pension of approximately $380 each per fortnight ($19,800 per year as a couple). To receive income adequate for their needs, they’re drawing approximately $40,000 a year from their super savings, for a total income of just under $60,000 per year. This is less than they would like but is sufficient for their basic expenses.

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Since their current situation can’t continue for much longer before their super savings are exhausted, the couple is considering two options:

• Renting out the city apartment
• Selling the apartment to invest in super using downsizer contributions.

Without the downsizer measure, Suzanne and Bill could not add to super because other personal contributions are not permitted for people aged 75 or more.

Although the apartment is not their current home, it was previously. As a result, the sale of the property would be partially exempt from capital gains tax under the main residence exemption. This is enough to qualify for the option to make downsizer contributions.

Option 1: Rent out the apartment

The apartment could be rented for a net amount of $480 a week after agent’s fees, bringing in nearly $25,000 additional income.

This additional income would not further reduce the Age Pension.

Suzanne and Bill would still need to draw $15,000 a year from their super savings to top up their income. According to the ASIC Moneysmart account-based pension calculator, the couple’s super would likely last until age 93, drawing a combined total of $15,000 a year if they invested in a balanced option.

They can maintain their income of $60,000 a year, but can’t afford the kind of retirement lifestyle they would prefer.

Option 2: Sell the apartment and make downsizer contributions, partially invested in lifetime income streams

The sale of the apartment could bring net proceeds of $585,000 after estate agent commissions and marketing fees. Suzanne and Bill won’t need to pay any tax on the capital gain from the sale because they have only very limited taxable income from the Age Pension and most of the gain is exempt from CGT under the main residence exemption. The remaining taxable gain leaves their total taxable income below the level where income tax becomes payable.

Suzanne and Bill plan to split the sale proceeds equally to make downsizer contributions to super and use their total balances of $392,500 each (including their existing balances of $100,000 each) to start income streams for retirement.

To improve their assessment in Centrelink means tests, the couple will invest half their super savings in lifetime income streams and half in simple account-based pensions.

The lifetime income streams are expected to pay $16,300 each in the first year. If either Suzanne or Bill passes away, their lifetime income will continue to be paid to the other partner until their death. This income is based on an estimate from QSuper’s lifetime pension product.

Only 60% of the income paid from lifetime income streams is assessed in Centrelink’s means tests. Initially, 60% of the purchase price is assessed in the assets test and this reduces to 30% of the purchase price when you turn 84 (or five years after purchase, whichever occurs last).

The couple’s new position for Centrelink assessment is:

• $392,500 account-based pensions (financial asset)
• $235,500 lifetime pension asset value (60% of the $392,500 purchase price)
• $20,000 personal assets (home contents, car)
• $19,560 income from lifetime income streams (60% of the actual $32,600 income paid)

The new assessment results in a combined Age Pension of $33,215 a year for Suzanne and Bill. This is $13,415 more than if they choose to rent out the apartment, thanks to the favourable means testing of their lifetime income streams.

Their income position is:

$33,215 Age Pension

+ $32,600 lifetime income stream

+ $23,550 account-based pension (minimum withdrawal)

= $89,365

By selling the apartment, the couple can increase their annual income by nearly $30,000 and enjoy regular holidays and leisure activities they couldn’t afford previously. Like in our first example, the trade off is that the property is no longer available to form part of their estate.

The bottom line

Selling a property to make downsizer contributions can affect the rate of Age Pension you receive. The impact depends on whether you will remain a homeowner, your total income and assets, whether the value of the property was assessable in means tests prior to the sale and the type of product you invest your contribution in.

Before acting, you should consider your own personal situation and seek financial planning assistance if required. Centrelink’s financial information service can also be informative.