How the proposed changes to pension laws will benefit downsizers

The proposed changes to the social security laws in Australia would provide pensioners incentives to downsize and find a more appropriate home.

The Social Services and Other Legislation Amendment (Incentivising Pensioners to Downsize) Bill 2022 will remove the barriers that inhibit age and service pensioners from downsizing due to the application of the means test to the sale proceeds of a home.

The changes, if enacted before the year ends, will take effect from 1 January 2023. If the amendments are enacted next year, the changes will apply one month after.

How the current system works

According to SUPERCentral, when a pensioner sells their home and does not immediately apply the sale proceeds in the purchase in the purchase or building of a replacement principal home, the sale proceeds will be counted as an asset for the purposes of the Assets Test.

“Assuming the sale proceeds are credited to a bank account, will be treated as a financial asset and therefore subject to the deeming test,” SUPERCentral said in a statement.

“Consequently, the deemed income of the bank account to which the sale proceeds have been deposited, will be counted as income for the purposes of the Incomes Test.”

This can result in a reduced and age limitations on pension entitlement — when the pensioner downsizes, they converted an asset that is protected from the Means Tests to being treated as such.

How the proposed changes will play out: a case study

To illustrate how the changes will benefit pensioners, SUPERCentral gave the following scenario:

A pensioner named Eleanor sells her current house and receives $900,000 in net proceeds. She plans to use $850,000 to downsize, leaving the rest of the proceeds to her emergency fund.

As she finds a home to downsize to, Eleanor invests the money into a bank account and decides to rent.

She manages to find a replacement home and moves in exactly two years and eight months after the sale or her first principal home.

What happens under current arrangements

The sales proceeds are not counted as an asset for 12 months following the sale if they are intended to be used to acquire a replacement residence.

Eleanor’s $850,000 in the bank is not counted as an asset for the Asset test but the $50,000 emergency fund is. If it were not due to the current arrangement, she would have immediately had her pension terminated.

This would change 12 months after, as the $850,000 would now be treated as an asset for the Means Test.

“This would reduce her pension to nil which would be the case until she applied the $850,000 in acquiring a replacement residence,” SUPERCentral said.

Eleanor can apply for an extension at Centrelink but she would have to establish a good reason to have the sale proceeds not be counted as an asset for another 12 months.

With regards to the Income Test, the entire proceeds of $900,000 will be subject to deeming — at current deeming rates, an amount of $779 would be counted.

“If Eleanor was on a full pension before the sale had fully utilised her free income limit, her pension post-sale, due to the deemed income, would be reduced by $389 per fortnight which is a material reduction,” SUPERCentral said.

What happens under the proposed changes

Under the proposed changes, the sale proceeds would not be counted as an asset for the Asset Means Test for 2 years following the sale. Eleanor can apply for an extension provided that she has good reasons to justify her request.

In terms of the Income Test, the portion of the financial assetarmarked for acquiring a replacement home, which in Eleanor’s case is $850,000, will constitute a separate pool of financial investments to which the deeming provisions will apply.

The separate pool created will be deemed at a below threshold rate of 0.25% of the entire value of the pool.

Meanwhile, the balance of the home proceeds will be included in the general pool of financial investments, applied with the normal deeming rates of 0.25% on the first $56,400 and 2.25% on the balance.

“Under the proposed deeming arrangements, Eleanor will have $82 of deemed income per fortnight from the separate deeming pool for the sale proceeds and $43 of deemed income per fortnight, assuming the entire balance of the home proceeds at the higher deeming rate.   This would reduce her age pension by $62.50 per fortnight,” according to SUPERCentral.

Without separating the funds into two pools, Eleanor’s age pension would have been reduced by $865 per fortnight.

“The example clearly shows the proposed beneficial treatment provided to the sale proceeds arising from the sale of principal home where there is a delay in acquiring a replacement home,” SUPERCentral said.

Property Council of Australia executive director of retirement living Ben Myers said the proposed changes make sense on different perspectives, as it would incentivise older Australians to unlock their home equity and right-size into more suitable housing options.

“Encouraging older Australians to right-size, not only contributes to healthier ageing, it’s also one of the smartest and fastest ways a government can boost much needed housing supply for families,” he said.

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Photo by studioroman on Canva.