Selling the family home is one of the major economic and personal decisions faced by Australians as they approach retirement.
There are many potential advantages, but the trade-off can be the unintended or underestimated emotional and financial costs of the move.
Motivations to move can be many. But so can the potential traps.
Extra Retirement Money
Downsizing to a smaller less expensive residence can release equity that can boost a retirement nestegg.
The 2017 Federal Budget, as part of measures to address the national housing affordability crisis, announced that individuals over age 65 could make non-concessional superannuation contributions of up to $300,000 each from the proceeds of selling the family home.
To qualify, the home needed to be owned by the individual or couple as a principle place of residence for 10 or more years.
The individuals do not have to satisfy the work test. Contributions do not count towards annual individual non-concessional contribution caps and do not form part of the $1.6million pension account balance restriction.
While this could be a great economic incentive for many retirees, those who currently qualify for the full Age Pension may have their pensions reduced or even ceased completely. This economic trade-off needs to be analysed and understood by retirees in this situation.
Beware Making a Wrong Move
Moving into a property with reduced upkeep is one of the primary motivating factors for downsizers.
Most retirees are keen to spend less time on property/garden maintenance and more on pursuits such as travel, sports, hobbies and spending time with grandchildren.
But sometimes what looks good on paper may not always turn out as planned. Some of the mistakes downsizers can make include:
Some of the mistakes downsizers can make include:
Underestimating the costs involved – property agent fees, costs of relocation, new furniture, landscaping etc
Moving into a property too small or generally unsuited to lifestyle requirements
Underestimating the emotional challenge of saying goodbye to the family home and having to cull many of your possessions
Wrongly assuming that a sea/tree change to a holiday destination will work as a permanent address
Failing to discuss the implications of the move with family members
This is where a Try Before You Buy plan can be a valuable interim step.
If you sell a family home in the suburbs and think that unit living might suit you in retirement, why not rent a unit for six months and see if you like it?
Or, if you think you may want to move to a beachside address, why not rent there first to see if it works for you?
Keeping the Family Home As An Investment
When faced with the financial and emotional challenges of downsizing, sometimes keeping the family home as an investment can be an attractive option.
This can work hand-in-hand with a Try Before You Buy strategy, allowing downsizers to rent elsewhere without having to make the final decision on selling the family home.
Consideration needs to be given to whether the rent from the family home will provide enough income to cover upkeep and maintenance costs, plus pay for the rent on the new property.
Taxation implications on the receipt of rent and any potential capital gains tax exposure also need to be investigated.
Leaving Children Behind in the Family Home
This is an option considered by families, particularly in capital cities where new house prices and rents are high.
But if the cashflow from the rent is an important part of the economic mix, then it can sometimes be hard for parents to extract full rent from their progeny. But if they don’t, then they end up paying for the upkeep of two properties.
This is where it is advisable to put a formal agreement in place with the children that sets terms on an arms length basis.
This agreement will set expectations on both sides and protect both sides just like any normal rental agreement.
Granny Flat Option
One variation of keeping the family together can be the granny flat scenario, where the downsizers move into a granny flat somewhere on their existing property, while a child moves into the main residence.
In this scenario, what typically happens is that parents transfer ownership of the property to their children and, in return, the children agree to look after their parents for the duration of their lives.
Parents transfer the title of the home, build a granny flat and live in it under a life interest arrangement.
If the parents are on Centrelink benefits, the transfer price will not affect the retirees income or assets test, provided the transfer price is considered fair and reasonable.
Transfers undertaken at a price considered less than fair and reasonable will attract scrutiny from Centrelink (assets test deprivation rules) and potentially the Office of State Revenue (Stamp Duties).
Moving To a Retirement Home
Retirees have the option of using the proceeds of their family home to buy into these purpose built complexes specifically designed for residents over a specific age.
These retirement villages usually offer both independent and assisted living options, with facilities ranging from basic to high end luxury, with price points to match.
In most cases, the contracts that must be signed by individuals and couples moving into these villages are very different from the traditional purchase of a property.
Those considering this move need to get a copy of the contract, engage a solicitor to explain the terms in common language and, in most cases, make sure their children also understand how the contract will operate.
While there are many happy residents living in retirement villages, there has been media spotlight in recent years on some residents very upset with the level of care and facilities offered (or not delivered) by some operators.
In addition to understanding the contract, it also is advisable to speak with existing residents and staff at the facility. This can often be the best inside information on the positives and negatives of the village you are considering.
Many existing retirees and those approaching retirement are living in very valuable property assets.
Those who can contemplate moving out and potentially selling the family home are likely to have some improved economic options.
These options need to be analysed and considered as part of a well constructed retirement planning strategy to find the solution that is the best for each individual or couple.
Source: Advising Downsizers; by Sarah Broady (Retirement Adviser, The Retirement Advice Centre) and Ricky Soo (Senior Financial Planning Manager, NAB Financial Planning;, Kaplan Professional August 2017.