How Unlocking Home Equity Could Cost You Your Age Pension

For many older Australians, the family home is their most valuable asset. As retirement progresses and the kids move out, downsizing to a smaller, more manageable property can seem like a smart financial move. It can free up cash, reduce maintenance costs, and even improve lifestyle. But for couples receiving or expecting to receive the Age Pension, this decision can come with an unexpected sting: a reduction or complete loss of their pension entitlements.

The Age Pension and the Assets Test
The Age Pension is means-tested, meaning both your income and assets are assessed to determine your eligibility and payment rate. For homeowners, the family home is exempt from the assets test, regardless of its value. However, once you sell and downsize, any surplus cash from the sale becomes an assessable asset.

As of 1 July 2025, the assets test thresholds for a couple who own their home are:

• Full pension: Assets must be below $481,500 (combined)
• Part pension cut-off: Assets must be below $1,059,000 (combined)

For every $1,000 of assets above the lower threshold, the couple’s combined pension is reduced by $3 per fortnight, or $78 per year.

A Common Scenario: Downsizing Gone Wrong
Let’s consider a worked example.

John and Margaret, both aged 70, live in a mortgage-free home in Brisbane valued at $1.2 million. They have modest savings of $100,000, $350,000 in an account-based pension and other lifestyle assets (contents & car) of $30,000. Based on their current situation, they qualify for the full Age Pension, as their assessable assets are below the $481,500 threshold.

They decide to downsize to a townhouse worth $800,000, freeing up $400,000 in cash. They plan to use some of it for travel and keep the rest in a term deposit for future needs.

After the move, their assessable assets increase from $480,000 to $880,000 (the $400,000 cash plus their existing assets). This puts them $398,500 over the full pension threshold.

The Financial Impact
Here’s how that affects their combined age pension:

• Excess assets: $880,000 – $481,500 = $398,500
• Pension reduction: $398,500 ÷ $1,000 × $3 = $1,195.50 per fortnight
• Annual reduction: $1,195.50 × 26 = $31,083

So, by unlocking $400,000 in equity, John and Margaret lose $31,083 per year from their Age Pension.

Deeming and the Income Test
It doesn’t stop there. The income test also applies. The government assumes that financial assets (like bank deposits or shares) earn a certain rate of return, known as the deeming rate. As of July 2025, the lower deeming rate of 0.25% applies to the first $106,200 of combined financial assets for a couple, and 2.25% applies to the rest.

In John and Margaret’s case, their $850,000 in financial assets would be deemed to earn:

• 0.25% on $106,200 = $265.50
• 2.25% on $743,800 = $16,735.50
• Total deemed income = $17,001 per year

Since their Age Pension is assessed under the assets test (as this delivers the lower rate of Age Pension) we don’t need to consider the income test on this occasion.

The Hidden Cost of Cash
While downsizing can improve liquidity and lifestyle, it’s essential to understand how Centrelink treats the proceeds. The family home is a powerful shelter from the assets and income tests. Once converted to cash, that protection disappears.

What Can You Do?
Before making a downsizing decision, consider the following:

• Seek financial advice: A licensed financial planner can model the impact on your pension and help structure your assets efficiently.
• Explore the Home Equity Access Scheme: If you need extra income but want to stay in your home, this government scheme may allow you to borrow against your home’s value.

Conclusion
Downsizing can be a great lifestyle choice, but it’s not always a financial win. For Age Pension recipients, the shift from a non-assessable home to assessable cash can trigger a significant reduction—or even loss—of pension entitlements. Understanding the rules and planning ahead can help you avoid this costly pitfall.