Q. When I sell my property, value around $880,000, my son wants me to move into an apartment he owns, paying the rent of $650 a week he currently receives.  My total other assets are about $220,000; $90,000 in super, $52,000 in investments and the remainder in a joint bank account. My wife & I receive  small pensions from the UK of $114 a week. and around $505 a week from Centrelink. My wife’s annuity brings in $18,300/year but runs out in 2yrs and my annuity is $8,800 and runs out in 9yrs. Should I buy the unit from my son or pay rent?

A. Great care needs to be taken with downshifting; will the property meet your long term needs?  Will you have sufficient s income to meet your future living expenses?

The starting point should be do you want to live in your sons apartment either as a tenant or as an owner?  The decision should be based on your lifestyle needs and expectations for the future.  It may help your son to have a family tenant or sell to a family member, but you need to make sure that leasing or buying the property is aligned to your long term needs and is in a location that suits you.

Once you have made a decision on where to live, the other key consideration is your income needs.  You are receiving combined income of approximately $60,000.  This is a mix of Age Pension, UK Pension, Annuity and investment income.  Assuming you spend all income currently received, with only 2 years remaining on your wife’s Annuity, you will need to replace that income into the future. You will face the same issue in 2022 when your Annuity expires.  Typically replacement of income would be achieved by selling the family home and investing a portion of the proceeds into income producing investments.

To replace an Annuity income of $18,300 would require Capital of approximately $350,000 if looking to preserve the capital sum.  Without knowing your age, it would be hard to determine an appropriate length of term for a Term Annuity.  Typically you would look at life expectancy plus 5 years.

The value of your home is exempt for Centrelink Aged Pension purposes, however when you sell the home and invest a portion of the proceeds, the amount invested becomes assessable under the assets test.  So with a home valued at $880,000 and other assets of $220,000, you would lose the majority of your Centrelink Pension if you rented your sons property.  Apart from this you would also have to fund the rent costs of $33,800 a year.

Between commission on sale and Stamp Duty on purchase, the costs of buying and selling property are expensive.  Care needs to be taken to ensure you have a very clear understanding of how much income you will need now and into the future.  Ensure you release sufficient capital  to meet your income needs so you don’t end up having to “downshift again” into the future. There are alternative equity release options available on the market for retirees but they all come at a cost.

Get advice to make sure you are on the right track and aware of any pitfalls. You cannot afford to get it wrong.

Follow Andrew on Twitter @AndrewHeavenFP.  This article was originally published in The Australian.