Downsizing and Centrelink Implications

Downsizing the Family Home: Centrelink Implications

At some point in life, many Australians start to consider downsizing from their large family home. The kids have moved out, the upkeep is a little more demanding, and the idea of a fresh start somewhere smaller and more manageable becomes very appealing. But for those receiving or applying for the Age Pension, it’s important to understand the Centrelink implications before taking the plunge.

This guide will walk you through the rules, benefits, and potential traps when it comes to downsizing and how it affects your Age Pension. Let’s explore the financial, practical, and emotional side of this big decision—and make sure you know what to expect when it comes to Centrelink.

Why Do Older Australians Downsize?

There are many reasons people downsize. For some, it’s about releasing equity from their home to top up retirement savings. For others, it’s about living in a low-maintenance home closer to family, amenities, or healthcare. Downsizing can be an exciting new chapter—less cleaning, fewer stairs, lower bills, and more lifestyle options.

But the big question is: what happens to the Age Pension when you sell the home and suddenly have a chunk of money in the bank?

Your Family Home and the Age Pension

Under Centrelink rules, your principal place of residence is exempt from the Age Pension assets test. That means the value of your home doesn’t count when calculating your pension eligibility or payment amount. It’s one of the biggest advantages of being a homeowner in retirement.

However, when you sell your home, things can get more complex. That money from the sale, if not immediately used to buy another principal residence, is assessed under the assets test. This can reduce your pension—or stop it altogether—until you’ve bought your new home.

The Assets Test Explained

The assets test is a key component of Age Pension eligibility. Centrelink assesses the value of what you own, excluding your primary residence. This includes cash in the bank, shares, superannuation (if you’re over Age Pension age), vehicles, and other property.

If your total assets exceed the threshold, your pension may be reduced or stopped. The thresholds differ depending on whether you’re a homeowner or non-homeowner, and whether you’re single or partnered. When you downsize, the proceeds from the sale of your home temporarily make you a non-homeowner—unless you quickly buy another residence.

The Income Test and Sale Proceeds

The income test works alongside the assets test to determine your Age Pension. The money you receive from selling your home can be deemed to be earning income, even if it’s sitting in a bank account. This “deeming” process means Centrelink assumes your money is earning a certain rate of interest—even if it’s not.

This deemed income is then counted towards the income test and could reduce your pension accordingly. That’s why it’s essential to understand both tests before making any decisions.

The 12-Month Exemption Rule

There’s some good news. Centrelink provides a 12-month exemption period for Age Pension recipients who sell their home and intend to buy or build another. During this time, the sale proceeds intended for the purchase of a new home are not counted under the assets test.

This gives you a valuable buffer. However, the money is still subject to the income test under deeming rules. And if you don’t use the funds to buy a new home within 12 months, Centrelink will reassess your situation, which could affect your pension.

In some cases, Centrelink may extend the exemption to 24 months—usually due to delays beyond your control, like construction setbacks or health-related circumstances.

Downsizer Contributions to Superannuation

Since 1 July 2018, older Australians have been able to make downsizer contributions to their super. If you're aged 55 or over, you may be eligible to contribute up to $300,000 (per person) from the proceeds of selling your family home into your super fund.

There are some eligibility rules, such as having owned the home for at least 10 years. And while this is a great way to boost retirement savings, any funds moved into super could still be counted under the Age Pension means test if you're over pension age.

Strategies to Minimise Centrelink Impact

Here are some practical ways to reduce the risk of losing your pension when downsizing:

• Try to settle the sale and purchase of your new home close together.
• Keep receipts and records to show Centrelink you intend to buy another home.
• If you're building, explain the process and expected timeframe.
• Consider the downsizer contribution to super—but get advice first.
• Use a financial planner who understands retirement and Centrelink rules.

Examples to Bring it to Life

Let’s take a look at a couple of real-world-style examples:

Peter and Anne

Peter and Anne are both 72. They own a large home worth $1.2 million and receive a part Age Pension. They sell their home and receive $1.1 million after costs. They intend to buy a $700,000 unit. For 12 months, the remaining $400,000 is exempt from the assets test. But their deemed income rises, reducing their Age Pension slightly.

After they buy the new home, the leftover $400,000 is counted as an asset and further reduces their pension—but not as much as they expected, because they planned ahead and worked with a Centrelink-savvy advisor.

Shirley

Shirley, 79, sells her house for $850,000 and moves into a retirement village unit for $450,000. She contributes $200,000 to her super under the downsizer scheme. The rest she keeps in savings. Her Age Pension is reduced due to the increase in assessable assets and deemed income. But she enjoys lower bills and a better lifestyle—and she knew the trade-offs.

Things to Watch Out For

• Delays in buying a new home can cause problems—get your timing right.
• If you spend some of the sale money on holidays or gifts, Centrelink may still assess it as if you had kept it. This is known as “deprivation.”
• Living with family after selling can affect your status as a homeowner.
• Retirement village units have unique rules—especially under the assets test.

Get the Right Advice

Downsizing is more than just a move—it’s a major financial decision that can affect your lifestyle and your pension. Before making the leap, it’s worth getting professional financial advice. Many Centrelink decisions can be appealed, and knowing your rights and obligations makes a big difference.

You can speak with a Centrelink Financial Information Service (FIS) officer for free guidance, or talk to a specialist retirement financial planner.

Final Thoughts

Downsizing the family home can offer a fresh start and financial freedom—but it’s not without its challenges. Understanding how Centrelink treats the proceeds, knowing the timeframes, and planning your next steps carefully will help you make the most of your decision.

With the right advice and a bit of forward planning, you can move into a new chapter of life without losing control of your pension or your peace of mind.