Many lower-wealth retirees would be left worse off if they take up the Government’s proposed new scheme to help them downsize their home, an accountant has warned.

The federal budget, released a fortnight ago, contained several housing affordability measures, including a scheme to encourage older people in retirement to move out of big family homes into smaller houses and apartments.

From July 2018, the scheme will allow people aged 65 or more to put up to $300,000 from the sale of their homes into superannuation, earnings on which are tax-free after retirement.

The additional money will be also exempt from various existing limits on superannuation contributions, including the $1.6 million balance cap introduced in last year’s budget.

Jonathan Philpot, a partner at accounting and advisory firm HLB Mann Judd, said the changes will undoubtedly benefit some retirees who want to downsize, particularly those otherwise unable to contribute more to their super due to various restrictions.

“This could include those who do not pass the work test (this would be the majority) or who have total super balance above $1.6 million (this would be the minority),” he wrote in a note on the changes.

Key points:

• Retirees eligible for a part-pension likely to be worse off if they downsize under scheme
• Pensioners lose $78 per year for every extra $1,000 in assets, meaning they would need to get a 7.8pc per annum return
• Retirees who already have too much in asset value to get the pension will benefit from being able to boost tax-free super

Pension assets test could catch out unwary downsizers

Wealthier retirees would be the primary beneficiaries, as those with lower wealth (outside the family home) stood to lose pension payments at a rate greater than the likely earnings on any extra super they set aside.

Couples can have up to $821,000 and singles $546,000 in cash and assets outside their family home before they become ineligible for any part-pension payment.

So, for those under those limits, it probably still would not make sense to sell-up the family home to put extra cash into super.

“This is because the family home is exempt from the assets test for the age pension, but super is included in the assets test,” Mr Philpot explained.

“With the new assets test taper rate of $3 a fortnight for every $1,000 of assets, this works out as a reduction in pension payments of $78 in pension payments for every $1,000 now included in the assets test.”

“This means they have to … produce an after-tax return of greater than 7.8 per cent a year in order to be ahead of the current position – not an easy task in today’s environment.”

However, for those near, at or above the means test caps at which the age pension cuts out completely, the Government’s proposal starts making a lot of financial sense.

By being able to put the money into super, they will have a zero tax bill, other than any stamp duty they pay to state governments as part of the property transactions.

“Those who already have assets well above the assets test threshold would benefit from this type of change as it allows them to further increase their wealth in super,” Mr Philpot said.

Aside from the tax benefits, Mr Philpot told the ABC that super is an attractive destination to store this wealth freed up from housing because it is generally stable and well regulated.

ABC