Downsizer, Pensions

Downsizer may clash with asset test

downsizer asset test

A number of changes related to downsizer contributions and asset test exemptions may reduce pension entitlements if used incorrectly at the same time.

Retirees looking to make a downsizer contribution to coincide with the period during which the proceeds of the sale of a principal residence are exempt from the pension asset test should be aware those actions may clash and threaten pension entitlements.

Institute of Financial Professionals Australia head of superannuation Natasha Panagis said the Social Services and Other Legislation Amendment (Incentivising Pensioners to Downsize) Bill 2022, which received royal assent on 29 November, may create problems for people in regards to the asset and income tests.

The bill extends the exemption of home sale proceeds from pension asset testing from 12 months to 24 months where those proceeds are intended to be spent on purchasing a new home, building a new home or repairing or renovating a home.

“During this exemption period of 24 months, pensioners will continue to be treated as homeowners for means testing purposes,” Panagis said during a recent online briefing.

“This measure will apply for any principal home sold from 1 January next year, but it is a good measure for pensioners,” she said, noting anyone using it should pay attention to the asset thresholds that apply.

“The principal place of residence is exempt from the asset test for age pension purposes and for other income support purposes, and homeowners have a lower asset threshold before their pensions are impacted compared to non-homeowners.

“For a single person to get the full pension, their assets must be below $290,000 and for a couple their assets must be below $419,000.

“If they are looking to sell their home, the proceeds from the sale, if earmarked to buy or build a new home, will be exempt for 24 months for asset test purposes, but for income tax purposes they will count as a financial investment.

“With the reduced downsizer contribution age now at 55, this asset test exemption and the home sale proceeds do provide opportunities for people to take advantage of that lower age.

“However, it’s worth noting these two measures conflict with each other because downsizer contributions count towards the assets and income tests and therefore affect pension entitlements.

“Having money in super and perhaps adding more will drive up their investments levels and potentially reduce their pension benefits.

It’s worthwhile then for people who are entitled to the age pension to take care and to consider any impacts prior to undertaking any downsizer contribution strategy.”

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