Downsize your home and MAXIMISE your super!

Downsizers can now make an after-tax contribution to their super of up to $300,000, using the proceeds from the sale of their main residence. For couples, this means up to $600,000 can be contributed toward super!

The Federal Government is encouraging people aged 65 and over, who have lived in their home for at least 10 years, to downsize and put extra money into their superannuation funds. Australians aged 65 and over who are downsizing for retirement can now contribute the proceeds from the sale of their main residence, up to $300,000 into super.

We take a look at what this could mean for you.

Super benefits for downsizers

Usually, people aged 65 to 74 need to satisfy a work test to make voluntary super contributions, while people aged 75 and over are generally unable to contribute to their super.

However, that changed on 1 July 2018, with those aged 65 and over now able to make a non-concessional contribution to their super of up to $300,000 using the proceeds from the sale of their main residence – regardless of their work status, superannuation balance, or contribution history.

Case study

For Tom and Hazel it’s time to downsize their $700,000 home to a smaller $500,000 home. After 1 July 2018, for the first time, they have the opportunity to boost their super with the remaining $200,000.

How does it work?

Proceeds from the sale of your main residence that are contributed into super as part of this initiative can be made in addition to any other before-tax or after-tax contributions you’re eligible to make.

The government said the aim is to encourage older Australians, where appropriate, to free up homes that no longer meet their needs and make room for younger growing families.

To qualify:

• The contracts for sale must be exchanged on or after 1 July 2018
• The property that’s sold must be in Australia and excludes caravans, mobile homes and houseboats.
• It does not need to be your current home — it can be your, or your partner’s, former home as long as you or your partner have owned it for more than 10 years and lived in it at some point in your life.
• An investment property that neither of you have lived in is not eligible.
• The property does not need to be owned by both members of a couple for both of you to make a contribution of up to $300,000 to your super.

‘Downsizing’ contributions are not tax deductible and can be made regardless of super caps and restrictions that otherwise apply when making super contributions. 

Things to note

No special Centrelink means test exemptions apply to the downsizing contribution. Due to this, there may be means testing implications as a result of downsizing, which need to be considered.

Meanwhile, additional rules may apply to your situation, so make sure you do your research before making any decisions. Check out our infographic below for a snapshot of some of the advantages and considerations.

Home downsizing scheme to help with smaller super balances

The following table shows a hypothetical couple with varying starting super balances and the boost in sustainable annual income to life expectancy (at 75% certainty with super invested in a balanced fund) if they downsize rather than retain their home.

For example, a couple with just $100,000 in super could expect a $27,759 boost in their real annual income if they sold their family home and invested $600,000 of the proceeds into their super.

A key reason is the threshold for Age Pension eligibility. The Age Pension asset test threshold for couples who own their home is $380,500 in assets, cutting out completely at the upper limit of $837,000.

In other words, for a couple with a balance of $100,000, nearly half of the downsize proceeds, $285,500 would not factor into the Age Pension asset test being under the threshold. On the other hand, for a couple with a starting balance over this threshold, all downsize proceeds would reduce, or eliminate altogether, eligibility for the Age Pension.

The interactions between retirees own assets and the Age Pension are complex:

• Below the full pension threshold, additional assets can be used to bolster retirement incomes.
• As asset balances rise above the full pension threshold, yet still remain below the upper limit, assets support higher drawdowns but reduce pension entitlements.
• Even with asset balances above the upper limit – where there is expected to be no pension entitlement at the start of retirement – as assets are drawn through, retirement pension entitlements return.

The Age Pension provides a base level of sustainable income, indexed to inflation, and acts as a hedge for poor fund returns when assets are between the lower threshold and upper limit where lower asset balances increase the pension entitlement.

For example, an additional $100,000 invested in a balanced fund with a starting balance of $500,000 is expected to support an annual sustainable income of about $3,500 (at 75% certainty over a retirees’ expected lifetime). However, with a starting balance of $100,000, and therefore full entitlement to the Age Pension, an additional $100,000 invested in super will support close to $6,000 of additional sustainable income.

Retirees selling their primary residence will also incur a range of transaction costs such as stamp duty, real estate agent and legal fees. Similarly, the purchase of a new property will incur another round of costs, including relocation expenses.

The downsizing legislation, which was finally passed last December, allows older Australians to unlock large sums of wealth in their family home to pay for health, aged care, or other productive purposes. It is also aimed at increasing housing supply after a five-year east coast property boom has locked many younger Australians out of the market.

However, downsizing has been relatively uncommon among older Australians.

Only 20% of older Australians have downsized by selling a primary residence to buy another property, while only 5% of Australians have sold their property to rent. A recent survey by seniors advocacy group National Seniors found that the legislation would encourage 17% of ‘stayers’ (who did not intend to move) to consider downsizing, although almost one-quarter (24%) would consider downsizing if the sale proceeds were exempt from the Age Pension assets test.

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Disclaimer: This is general information only and should not be taken as financial advice. Please speak to a Shore financial planning professional before making a decision on your home loan. Originally sourced from AMP Super and ATO website.