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Home-owner pensioners worse off under Budget 2017

Glenn Freeman  |  25 May 2017Text size  Decrease  Increase  |  
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Some retirees would be left in a worse financial situation by the home downsizing provisions announced in Budget 2017, says a wealth manager from accounting and financial planning firm HLB Mann Judd.


With the stated aim of freeing up family-sized housing stock, Federal Treasury announced a plan to enable downsizers over the age of 65 to make a non-concessional contribution of up to $300,000 into their superannuation fund, from the proceeds of the sale of their principal home.

Jonathan Philpot, wealth management partner, HLB Mann Judd, urges caution for some individuals over the age of 65--such as those who are receiving the government aged pension, either in part or full.

"For a couple who have accumulated assets greater than $821,000, or $546,000 for a single person, they're already above the [aged pension] assets test," he says.

"But for those that might be receiving a part or full aged pension, they need to have a look at whether that is the right thing to do, because your home is exempt from the assets test, whereas your super is included."

This potential negative impact of the downsizing provision, due to come into effect from 1 July 2018, is magnified by changes to the pension assets test taper rate that were introduced in January 2017.

"It's now $3 [reduction in pension eligibility] for every $1,000 above the lower threshold, whereas it used to be $1.50. That's $78 pension that you're losing for every $1000 above that threshold."

For someone who already has $500,000 in super, "if they were to sell the family home and put in a total $300,000 into their super, all of a sudden their aged pension would reduce by $23,400 per annum--that's a sizeable cut to the family cash flow".

"Unless that $300,000 was invested and the after-tax return was greater than 7.8 per cent per annum, financially you're probably worse off by following this strategy," Philpot says.

He also makes the point that only a small number of his clients use the sale proceeds of their family home to boost their retirement savings.

"From my experience, while it's discussed as a strategy for those who've put most of their wealth into the family home and not put much aside for retirement ... it's surprising how few people do go down the path of selling down the home."

Both Philpot and Michael Hutton, HLB Mann Judd's head of wealth management, say lifestyle reasons--such as moving from a double-storey home with stairs to a single-level home--are usually the main motivator for downsizing living arrangements in retirement.

"It normally is the lifestyle decision--such as moving closer to children, or a seaside change closer to the beach, but rarely do I see it influenced solely by the financial considerations," Philpot says.

"I think, overall, the changes will help boost retirement savings for people that are in the position to be able to put more into super, but if they are already receiving this part or full pension, then under the proposed rules, they probably wouldn't be in a better financial position."

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Correction: This article was edited to change the percentage figure in paragraph eight to 7.8 per cent, from 17 per cent - which was the incorrect figure.

Glenn Freeman is a senior editor at Morningstar.

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