Considering downsizing? You may benefit from the “right-sizing” initiative
The Federal Government is aiming to make downsizing for older Australians a whole lot easier by introducing a “right-sizing” Bill to Parliament.
On Thursday, the Labor Government introduced the Social Services and Other Legislation Amendment (Incentivising Pensioners to Downsize) Bill 2022, which has received good reception from the retirement community.
The Bill is yet to be passed through Parliament, however, the former Morrison Government was supportive of a similar scheme it was intending to put forward if re-elected. Former Prime Minister Scott Morrison even said that this initiative would “remove financial barriers for people wanting to downsize”.
So if this Bill passes, how will it benefit older pensioners looking to downsize from their current home?
How can downsizing affect the Age Pension?
The main problem the Federal Government has found with downsizing for pensioners is that their Age Pension can be impacted by the sale of the home.
Currently, if pensioners want to sell their home and use the proceeds to buy or build a new home, the proceeds are exempt from the social security assets test for up to 12 months.
But the proceeds from a sold house are usually deemed to be income at the upper deeming rate of 2.25 percent per annum (currently).
This can impact an older person’s Age Pension and how much of a Pension payment they get.
What is in the Bill?
This Bill will give pensioners an additional 12-month asset test exemption on the sale of their home to provide them more time to purchase, build, rebuild, repair or renovate a principal home before their Age Pension becomes impacted.
So for 24 months, the proceeds from selling your house will be exempt from the Age Pension assets test. During this exemption period, a lower income deeming rate will also be applied to the proceeds of your house.
If the Bill is passed, pensioners will see the deeming rate significantly lowered on principal home sale proceeds that are intended to purchase a new home – from 2.25 percent per annum to 0.25 percent per annum.
The deeming rate is an ‘assumed’ rate of return on financial assets, which would be used in determining pension amounts.
Having this lower deeming rate from a home sale means that selling your home to “right-size” wouldn’t impact your Age Pension too heavily.
Additionally, you would still be treated as a homeowner for means testing purposes during this exemption period and you will be eligible for Commonwealth Rent Assistance if you are paying rent for alternative accommodation.
Importance of downsizing
The Federal Government wants to encourage older people to move into more appropriately-sized homes while also freeing up housing stock for younger families that may need bigger homes.
Minister for Social Services, Amanda Rishworth, says the Downsizing Bill would benefit thousands of pensioners and other recipients each year.
With over 8,000 pensioners downsizing last year, Minister Rishworth says the Government hopes to see this number increase if the legislation is passed.
“We don’t want people putting off downsizing to a more suitable home because they are concerned about the impact it could have on their payment rate and overall income,” explains Minister Rishworth.
“These changes will give pensioners more flexibility to find a suitable new home and it will hopefully free up larger housing stock for younger families who need it.”
Is right-sizing good for pensioners?
The Property Council of Australia has welcomed the Government’s commitment to reducing the adverse financial impacts of downsizing for older people, describing it as a “win-win” for older homeowners and young families.
Ben Myers, Executive Director of Retirement Living at the Property Council of Australia, says the incentives for older Australians to move to homes that have less maintenance and are accessible will be very beneficial for older people wishing to remain living at home, independently, for longer.
Mr Myers added that this Bill just makes “sense” as previous Government reports and reviews over the last decade have found that many older Australians have their wealth locked up in their family home.
“Incentivising older Australians to unlock their home equity and right-size into more suitable housing options, especially purpose-built age-friendly communities, is a wise move by Government,” says Mr Myers.
“Encouraging older Australians to right-size not only contributes to healthier ageing, [but] it’s also one of the smartest and fastest ways a Government can boost much-needed housing supply for families.”
Mr Myers would also like to see an improvement in purpose-built age-friendly communities and housing to better cater to older Australians who need more affordable and accessible housing choices.
“Unless Australia is able to better provide the housing supply and choice that our ageing population needs, affordability and accessibility will be an increasingly dire social and economic issue,” says Mr Myers.
This Bill will complement the Government’s other commitment to freeze the deeming rate at its current level for two years – until 30 June 2024 – to reduce financial issues for older pensioners.