The $300k Dilemma

Downsizing and putting the extra funds into super may not leave you better off.

- Susan Hely

If you are weighing up the federal government’s new downsizer incentive, to start on July 1, take care. The new measure encourages people aged over 65 to sell their home and park $300,000 each, or $600,000 for a couple, in their superannuation fund.

It looks like a great way to boost low super balances, particularly as there are now strict limits on how much you can put into your fund, with caps of $25,000 for concessional (before-tax) contributions and $100,000 for non-concessional amounts.

But for the 80% of retirees who fund their retirement years with a combination of superannuation and the age pension, it is important to assess the impact of downsizing on their pension eligibility, as the extra money will be counted in the assets and income test.

Retirees will certainly get more money to spend. But in many cases they will lose part or all of their age pension. The government tightened the assets rules last year and the eligibility for the age pension tapers off quite sharply for home-owning couples with a super balance between $380,500 and $830,000 and for singles with a balance between $253,750 and $552,000.

“For many people it is not worthwhile to take money out of the home and be assessed under the age pension and assets test,” says Jonathan Philpot, financial planner with HLB Mann Judd.

The problem is that you lose $3 a fortnight ($78 a year) of the age pension for every $1000 above the threshold. It was $1.50 a fortnight before the changes. This means that for every $1000 you would need to make a return of 7.8%pa to compensate. “Getting 7.8% is quite a difficult hurdle rate to get over in the current low-return environment,” says Philpot. “It is quite steep.”

There is a no man’s land where your ability to access the age pension plunges and your superannuation income is not high enough to replace it.