Selling home, Age Pension and Federal Budget 2022/23
Last week I presented an article explaining a number of measures introduced by the Albanese government in the “October Federal Budget 2022/23″. If you have not seen that blog, please read it, as there are some recommended changes that can impact your preparation for retirement or your current retirement if you are already there.
But today, I would like to go a bit deeper into explaining one recommended change that I think every pensioner needs to know about and understand, especially if you are planning or already in a process of selling your family home.
During retirement, many people decide to sell their family home. This could be for a variety of reasons:
- Downsizing – that is usually selling a more expensive home to buy a less expensive dwelling and have surplus cash to provide for future income needs. It doesn’t necessarily mean changing for a smaller place, but sometimes those two might go hand in hand,
- Upsizing – this is the opposite situation, when you sell a cheaper home and wish to buy a more expensive one, for example to be eligible for Age Pension. As we know a family home is the only asset that is 100% exempt from means testing, so for some it might be the only way to access Age Pension benefits as well as the Pensioner Health Card.
- Sea-change – and then some people might want to just simply move to a completely different environment, leave the city and move to the country, sell the farm and move near a beach, leave cold Victoria and move to a warmer parts of Australia such as QLD, NT or WA, or the other way, leave the hot land of Australia and move to Victoria or Tassie.
- Moving closer to your family, or the opposite running away to have peace and quiet.
It is amazing how different we are, but this is what retirement is all about retirement should be your time and should be designed the way you envisage your non-working life.
If you sell your family home and buy a new one, it is very difficult to match the settlement dates. I always advice my clients to try to keep those days of sell and buy settlement as close as possible, but sometimes it is not that easy.
But why do I advise my client to keep those dates close to each other? Well, this is due to the impact your money has on your Age Pension, when funds from the sale of your family home sits in your bank account before you spend it again on your new home.
Most people think that since this is money from the exempt asset, therefore it is also exempt in your bank account while awaiting the purchase of a new place. This is not the case.
If you sell your family home now, providing you advise Centrelink that you are planning to buy a new home, the total value of the sale of your original home will be exempt for a period of 12 months under the Assets Test.
But, but what most people do not realise that funds in the bank account awaiting purchase of your new place is most certainly subject to the Income Test, hence it might reduce your Age Pension severely, until such time that money again is locked in your new home after the settlement date.
To give you an example of this impact, let’s meet Jane, a single Pensioner that just sold her family home for $1.2mil. Jane has $100,000 in her bank account, so she has used up the Lower deeming rate of 0.25%, therefore the full balance of the sale of her home is subject to deemed rate of 2.25%. That is an equivalent of income of $27,000pa
As the outcome, Jane’s Age Pension will be reduced from the full payment of $987.60, down to $541.79, which is the Age Pension payment reduction of $11,591.
If we look at the same scenario for a couple, the Age Pension reduction is very similar of $9,321pa.
You might say, what’s the big deal, the money in the bank account can still earn more that the loss of the Age Pension income. That’s correct, but let’s look at this example.
Let’s meet Marisa, a single lady who only receives a part Age Pension of $484.10pf. She also has $100,000 in bank account, but she has a defined pension benefit of $30,000pa. Defined benefit is a type of a pension fund that is mostly provided to a government employees or people that are within the old superannuation system, that only provides income payments, with no access to any lumpsum cash withdrawals.
If Marisa sells her home for $1,2mil and parks her money in a bank account, she will actually lose her Age Pension entitlement under the Income Test.
If we look at this situation, but for a couple, you will manage to keep access to Age Pension, but only just, with payments of $276pf per person.
So now, when you think about it in Marisa’s case it feels very unreasonable to be losing your Age Pension benefit, just because you wish to move to a new place.
Can you see now, why I advise my clients to have those settlement dates as close as possible?
But the October Federal Budget introduced another change, that is very beneficial in the situation that I am describing today, selling family home, and buying a new one.
1. Before I mentioned that the balance of the sale of your family home is not counted under the Assets Test for a period of 12 months. Well… this has been extended to 2 years, and in some circumstances, when the settlement cannot proceed on time due to circumstances beyond your control, this can be extended to three years. That is great news, but just wait….there is more…
2. The balance of your cash, that comes from the sale of your family home, will be treated as a separate pool of funds to any other financial assets you have, and will only be subject to a lower deeming rate, that currently is 0.25%, regardless of the balance from the sale of your home.
So if we go back to Janes’ situation, where her Age Pension dropped from the full payment down not $541pf, which is the reduction by $11,591pa, now with the change being implemented, Jane will be able to keep the full Age Pension payment, as her deemed income is no longer $27,000 but rather $3,000.
The same applies to the couple situation , no loss of Age Pension.
If we check Marisa’s situation, her Age Pension will only reduce by 20pf, rather then losing Age Pension entitlement altogether.
This change is scheduled to commence from the later of 1st January 2023 or one month after the enabling legislation received royal Assent.
So what do you think about this change? Do you see this as beneficial for Pensioners?
If you would like to have a more private discussion with me, to see how you can improve your financial position in retirement or when preparing for this important phase of your life, book a meeting with me, via my website.
On each page there is a “Book a Meeting” button that will take you to my calendar where you can choose the date that suits you. Easy, Then just answer couple of simple questions, so I know what we are discussing and we can meet either in my office in Boronia, Melbourne just at the bottom of the beautiful Dandenongs , or online.
Technology allows us to have a great discussion and meet face to face regardless where you are.
By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement
