The hidden cost of downsizing: How your home’s sale can hit your pension

Downsizing can free up equity to invest or spend. But for retirees receiving the age pension that can be a problem as you may be converting an exempt asset into an assessable one.

New data from over-50s developer GemLife shows that, of 1474 purchasers across 12 communities, the average equity release was $254,098 when downsizing into a land lease community.

That $254,000 can boost your savings, buy a new car, caravan or boat or help out the kids but it can also reduce your pension and other benefits.

For pensioners, the magic numbers are $333,000 if you’re single and $499,000 for couples. These are the asset test thresholds. Once your assessable assets exceed the threshold, your pension reduces by $3 a fortnight for every $1000 above the threshold.

Put simply you lose $7800 per year of pension for every $100,000 of assets over the threshold.

So what does releasing $254,000 actually mean? Well, it depends on what you start with.

A single person starting with $50,000 in assets would have $304,000. They would be below the $333,000 threshold, so there would be no reduction under the assets test.

If they started with $250,000, their assets would rise to $504,000, which is $171,000 over the threshold, their pension would be reduced by $513 a fortnight, or $13,338 a year.

And if they started with $500,000 they would have $754,000 after they downsize, that’s over the cut-off of $745,750, so their pension would be lost.

Couples can have more. A couple starting with $200,000 would have $454,000 after they move, and still be below the $499,000 assets threshold.

The question isn’t just how much equity can you unlock: it’s how much retirement income you will have left once you do.

If they started with $500,000 they would have $754,000 which is $255,000 above the threshold, reducing their pension by about $765 a fortnight, or $19,890 a year, under the assets test.

And if they start with $867,000 or more the move would push them above the $1.121 million cut-off and their pension would be lost.

These examples are deliberately looking only at the assets test. How you invest or spend matters. If you invest it, the income can help offset any pension reduction, but the deemed income will be used to calculate your pension under the income test.

If you spend it on a boat, car or caravan, those assets still count under the assets test but only at market value. It’s important to understand that your pension will be paid based on whichever test, income or assets, produces the lowest pension.

Downsizing your home can mean downsizing your pension, that doesn’t automatically make it a bad decision. You need to understand how much equity you will release, what you will do with it and how it will affect your pension and other benefits.

In a land lease community getting at least some pension can take on extra importance because the site fees qualify as rent for rent assistance, potentially adding up to $5819 a year (single) or $5486 (couple) on top of your pension.

The question isn’t just how much equity can you unlock: it’s how much retirement income you will have left once you do.

Rachel Lane is the author of Downsizing Made Simple, a book and website aimed at demystifying downsizing.

• Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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