Q My auntie is 65 and has no children of her own. She is single and owns her own home and has $57,000 remaining on her mortgage.  She wants to downsize because she cannot look after the huge backyard due to medical problems. I would like to know if she sells her home for $400,000 and uses that money to buy a unit for around $335,000 within 12 months will she lose her aged pension entitlement. Also what if it takes her longer than 12 months to find a new place and she has the money sitting in the bank. What is the best way for her to make this move into retirement?

A Your Auntie is eligible to apply for the Age Pension as she is 65.  In determining her entitlement to the Age Pension, Centrelink will apply two tests; the Incomes Test and the Assets test.  Whichever test provides the lower Pension entitlement applies.

When she sells her home, Centrelink do not count the sale proceeds of the sale for the first 12 months to give her breathing space to find the next home.  After 12 months if she hasn’t found a new home, the value of the sales proceeds will count as an asset for Asset Test Purposes.   As a single non homeowner she is entitled to have assets of up to $348,500  to receive the full Age Pension.  Assets counted, include personal assets such as contents and furnishings, motor vehicles and investment assets.

Assets in excess of the $348,500  threshold reduce her pension entitlement by $1.50 per fortnight for every $1000.  Please note that as announced in the 2015 Federal Budget, it is proposed to increase the fade out rate to $3 per $1,000 from 1 January 2017.  Hopefully she will have found a new home by then.

Investments assets are deemed to earn a rate of return, these are assessed against the Income Test. Income (deemed or earned) in excess of $160 per fortnight will reduce her pension entitlement by 50c per dollar assessed as income. The first $48,000 of investment assets are deemed to earn 1.75% and amounts above this are deemed to earn 3.25%.  If the actual income you receive from your investments is more than the deemed income, the extra income is not counted when assessing the rate of pension.

If she is looking to retain full Age Pension benefit entitlements, it would be better for her to find her new home within 12 months of the sale of the property.  If she hasn’t found a new home in that time, she would receive a reduced Pension benefit.  You make no mention of other investment assets so if there are other assets that count towards the Assets test, their value would need to be taken into consideration in calculating the impact.

In terms of her retirement planning, she would also need to consider the impact of the sale costs on her current home and the Stamp Duty costs on the purchase of the new property.  Costs on the sale of her current home (Commission and legals) could be  $10,000.  In Victoria, the Stamp Duty on a property costing $335,000 would be $13,120.  So all up the transition you refer to including clearing the mortgage would leave her with a gap of around $15,000 to fund from savings beyond the sale proceeds of her home.

She should consider the impact of this and her long term income needs.

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