Owning your own home is more than just part of the Aussie dream; it’s a vital piece in the puzzle of a sound retirement plan.
Especially now, as Australia grapples with a housing crisis, where over the next decade, more than 1.8 million new households are expected to form, leading to a shortage of over 100,000 homes in the next five years. In these times, having a place to call your own brings peace of mind and stability in retirement.
But here’s the thing: your home is not just a place to live; it can also be a strategic asset to enhance your retirement income.
As you consider downsizing, perhaps to a smaller or more conveniently located home for your retirement years, selling your family home emerges as a smart move to unlock the equity you’ve accumulated over the years. This move can significantly bolster your superannuation, ensuring a more comfortable and secure retirement.
The Australian Government is playing its part too, offering enticing incentives to assist older Australians in ‘right-sizing’ their homes. This strategy not only benefits you in your golden years but also helps alleviate the housing shortage by freeing up larger homes for younger families entering the market.
In this blog, we’re going to guide you through the ins and outs of downsizing contributions. Whether you’re considering a move to a more manageable home, simply curious about how this could affect your future, or looking for some alternative solution to downsizing we’ve got you covered.
But first, let’s define downsizer contributions.
What are Downsizer Contributions?
Ever thought about selling your current home, moving into something cosier, and using the extra cash to boost your super? That’s what downsizer contributions are all about. They’re designed to help you, as an older Aussie, make the most of your assets in retirement.
From 1 January 2023, the rules changed. Now, if you’re 55 or older, you’re in the mix for downsizer contributions. It’s a big shift from the original age limit of 65, making it more accessible than ever.
Here’s the clincher: Age is no barrier here. Even if you’re over 75 – an age when typically, super rules say ‘no more voluntary contributions’ – downsizer contributions say ‘yes, you can!’ This is a golden chance to give your super that extra kick, especially if you’ve missed out on contributing before.
And don’t worry if you’ve never worked a day or don’t meet the usual work test requirements for super contributions. Downsizer contributions don’t need any of that. However, keep in mind, you can’t claim a tax deduction for these contributions.
Now, let’s dive into the five key things every Aussie pensioner should know about downsizing contribution rules.
[ RELATED POST: Reverse Mortgage or Downsizing: Which Option is Best for Your Retirement? ]
1. You may contribute up to $300,000 ($600,000 for couples)
Under the downsizer contribution scheme, you have the opportunity to contribute a substantial amount from the sale of your family home into your super account. If you’re single, up to $300,000 can be added, or a significant $600,000 for couples. This contribution is calculated as the lesser of $300,000 or the actual sale proceeds. For instance, if you gift your home and receive no proceeds, you can’t make a downsizer contribution.
Interestingly, any existing debt or mortgage on the property doesn’t affect the contribution limit. These contributions are quite flexible, exempt from many standard super contribution caps. This means they won’t count towards your annual concessional (before-tax) or non-concessional (after-tax) contribution limits. You can make these contributions in addition to your regular super contributions without the worry of exceeding annual limits.
And here’s a notable perk: downsizer contributions don’t attract the typical 15% contributions tax when they enter your super account, making them an even more appealing option for boosting your retirement savings.
2. You should have owned the property for at least 10 years
Eligibility for the downsizer contribution hinges on specific criteria related to your property:
- Ownership Duration: Your property must have been in your possession for a continuous period of at least 10 years, typically from the date of purchase to the date of sale.
- Type of Property: The property sold should be your family home, your main residence at the time of sale, or eligible for a partial exemption from capital gains tax under the main residence exemption.
- Location: Your home must be located in Australia.
- Exclusions: Certain property types don’t qualify, including investment properties not lived in, caravans, houseboats, other mobile homes, and vacant land.
A crucial point to note: if the property is solely in one partner’s name, both partners are still eligible to make a downsizer contribution, assuming all other criteria are met.
3. Downsizer contributions to super are exempt from annual caps
A major advantage of downsizer contributions is their exemption from the typical annual super contribution caps. These contributions won’t impact your Total Superannuation Balance (TSB) until the end of the financial year, offering a strategic avenue to enhance your super without immediate cap concerns.
Once in your super account, they adhere to the standard tax rules of the super system. This means tax-free investment earnings in the retirement phase. However, they do count towards your transfer balance cap (TBC), influencing the amount transferable into the tax-free retirement phase and your Age Pension eligibility.
Remember, if your TBC reaches $1.6 to $1.7 million, downsizer contributions stay in the accumulation phase, taxed at 15%.
4. After selling your home, you’re not required to buy another and can only use the downsizer contribution once
When you sell your home and opt for a downsizer contribution, there’s no obligation to purchase another property with the proceeds. You’re free to choose, even if it means buying a more expensive home. However, it’s key to note that the downsizer contribution is a one-time opportunity – once used, it’s not available for future property sales.
Within 90 days of your property sale, you need to contribute to your super. While there’s flexibility in how you use the sale proceeds during this period, remember to comply with the Australian Taxation Office’s (ATO) regulations and complete the necessary forms. If your downsizer contribution doesn’t meet the criteria, it may be returned or taxed as an excess non-concessional contribution.
5. Selling your home and making a downsizer contribution may impact your government pension and aged care entitlements
Before you decide to sell your home for a downsizer contribution, it’s crucial to consider its potential impact on your government pension entitlements. Such a move could reduce or even eliminate your eligibility for the Age Pension or DVA service pension.
Remember, once you reach Age Pension age (currently 67 years), your super benefits are included in the assets test. The proceeds from your home sale are exempt from this test for up to 24 months, provided you use them to buy, build, or renovate another home. However, after this period, the remaining proceeds could affect your pension benefits if held in cash or financial instruments.
Additionally, your super balance, including downsizer contributions, plays a role in determining your eligibility for residential aged care and home care services and their fees. It’s wise to seek professional advice to understand how downsizer contributions might affect your specific situation.
Not Ready to Downsize? Try Reverse Mortgage First
Considering downsizing but not quite ready to take the leap? You’re not alone. Many Aussies, especially pensioners, are turning to Reverse Mortgages as an interim solution. This financial tool allows you to tap into your home’s equity, providing extra funds while you continue to live there.
It’s a practical step for those who aren’t prepared to downsize immediately but need to boost their retirement funds. Reverse Mortgages offer the flexibility to stay in your home while accessing needed resources, serving as a bridge until you’re ready to transition to a smaller residence.
How Reverse Mortgage Works
A Reverse Mortgage allows you to unlock the equity in your home, providing financial flexibility without having to sell or move out. Here’s how it works:
- Security and Ownership: Your home is the security for the loan, but you retain full ownership and can continue living there indefinitely.
- Equity Release: The amount available depends on your age and your home’s value, with different lending policies among providers.
- Interest Capitalisation: Interest accrues on the loan and compounds over time, with the balance increasing unless voluntary payments are made.
- Repayment Conditions: The loan is repaid when you sell the home, move into aged care, or upon the last surviving borrower’s death.
Reverse Mortgages offer various options:
- Lump Sum Payment: Ideal for immediate, large expenses like home renovations or debt consolidation.
- Regular ‘Income’: Receive monthly, quarterly, or yearly advances to supplement retirement income, helping cover living costs.
- Cash Reserve: Set up a reserve fund for on-demand access, paying interest only on the amount used.
This financial tool is a potential solution for enhancing retirement funds without downsizing, allowing you to leverage your home equity while maintaining your lifestyle.
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Reverse Mortgage Case Studies: See It in Action
Let’s look at some real-life examples of how Reverse Mortgages have helped Australians in retirement. These case studies will give you a practical perspective on using your home’s equity to enhance your financial situation, especially if you’re not ready to downsize yet.
Nick & Maria, 74 years old
Background
Nick and Maria, proud homeowners in metropolitan Melbourne, have experienced life’s highs and lows together.
Despite owning a property worth a hefty $1.5 million, they had an outstanding home loan of $60,000 with a bank.
Relying on the couple’s Aged Pension to fund their daily needs, they found themselves at a crossroads, struggling to uphold the lifestyle they once cherished.
Borrowers’ Concern
For Nick and Maria, the aspiration was clear: they wished to stay in their family home for the long haul.
However, the financial strain of their existing home loan and the aspiration for certain amenities, like a new motor vehicle, loomed large.
They felt the pinch of their limited pension income and yearned for a financial solution that could help them close out the home loan and afford some lifestyle upgrades.
Reverse Mortgage Loan Purpose & Structure
Reverse Mortgage Loan Amount: $150,000
Lump Sum Usage:
- Refinanced the outstanding $60,000K bank home loan.
- Purchased a new motor vehicle for $30,000.
Cash Reserve:
- $30,000 kept aside for unexpected expenses.
- Advantage: No interest on this undrawn amount.
Monthly Financial Support:
- Arranged a tax-free advance of $500 per month.
- This monthly boost is set for the next five years to supplement their pension.
Outcome
With this financial move, Nick and Maria rejuvenated their lifestyle. Free from the shackles of their previous home loan and enjoying the comfort of a new vehicle, they found renewed joy in their daily life. The regular monthly advance further alleviated their financial worries. Now, with a substantial cash reserve ready for any rainy day, they can look forward to a relaxed and secure future in their cherished family home.
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Disclaimer: This article is for informational purposes only and does not constitute financial advice. Please consult a licensed financial advisor before you make any decision.
