The downsizer to superannuation contribution has received several tweaks since it was first introduced in 2018. While keeping up with the changes, there are other quirks of the strategy that you should know – quirks that might encourage you to use the scheme to boost your retirement.
But first, a quick review of the downsizer contribution and how it can assist older homeowners.
The YourLifeChoices most recent Insights survey (6140 respondents) revealed that 72 per cent of retirees own their home outright; another 12 per cent own their home with a mortgage and 16 per cent rent.
It also showed that 57 per cent were confident they can maintain their property for life, though 33 per cent were not.
Only 20 per cent said they were considering downsizing, 56 per cent said they were not considering that option and 23 per cent were unsure.
Yet, the average superannuation balance among people aged 55 to 74 is between $150,000 and $200,000 – a world away from the sum required to generate a well-off lifestyle. The Australia Institute and YourLifeChoices estimate that inflation has pushed annual expenditure for a well-off lifestyle to $88,874 for couples and to $50,755 for singles.
Five years ago, those estimates were $74,813 and $42,767.
Inflation hurts, but given the mean housing price is now in excess of $910,000, the downsizer contribution may be just what you need – especially if you are otherwise ineligible to contribute to super because, for instance, you are over a certain age or have too much in super.
In the past five years, about 60,000 eligible households sold their homes and pumped $14.5 billion into superannuation, according to the Australian Taxation Office (ATO).
The downsizer contribution allows eligible Australians to contribute $300,000 from the sale of the family home to super – $600,000 for a couple. In 2018, the cut-off age to participate was 65. It was reduced to 60 in 2022 and to 55 in January 2023.
The ATO outlines the eligibility requirements and advises that a downsizer contribution is a non-concessional contribution, but doesn’t count towards the contribution cap.
Could downsizing really be upsizing?
But … what is considered downsizing? Don’t think for a second that it means moving into a much smaller – or even less expensive – dwelling, unless you want to.
It could actually be upsizing and moving into a bigger home. You could be moving into aged care or into an investment property. You don’t even need to have sold the place you’re living in – you could have sold another property that was once your home – so long as you meet the eligibility requirements.
The Australian Financial Review reports that John and Sandra Parker, a couple in bayside Melbourne, swapped their four-bedroom home for a three-bedroom apartment, paid more for the new property and still topped up their super.
AFR writer Duncan Hughes revealed: “This is because it is the sale of the family home that triggers eligibility to make the top-up. The contribution does not need to be from the sale proceeds of the property.”
A Sydney couple, Michael and Sue Ryan, decided to sell their five-bedroom home and downsize to an off-the-plan luxury complex.
“We bought an apartment because of the lifestyle the complex offers and the opportunity to top up our super,” says Michael, a retired IT consultant.
He says sale proceeds from his house will not cover the cost of moving and buying the apartment. But he will top up his super with other savings.
The downsizer incentive is one of superannuation’s best-kept secrets, says former Commonwealth Bank economist Michael Blythe. “If you look at the average return super funds have generated over the past decade, it could boost the income of a downsizer by $20,000 a year,” he told the AFR.
Downsizer disasters
Specialists emphasise that you must do your homework and get professional advice to be sure downsizing will improve your lifestyle.
They cite buying and selling costs, stamp duty, moving costs and a shortage of suitable alternative properties. Also, there might be a negative impact on any Age Pension payments.
BDO Australia financial adviser Kelly Kennedy says it’s vital to get it right the first time.
“Doing it right will not only free up housing for young people, but also frees up wealth for downsizers to fund a comfortable retirement,” she says.
But … be sure not to pay too much for the next home. Ms Kennedy says she often sees clients move from, say, a $2.6 million five-bedroom house to a $2.2 million townhouse.
“After factoring in stamp duty and moving costs, the downsizers are left with $300,000 in change, and that is not going to cut it if they are banking on this to fund their retirement,” she says.
BDO says stamp duty varies between states and territories. Victoria’s is the highest at $82,500, more than 30 per cent higher than Tasmania’s $62,685.
What are the alternatives?
If you need to top up retirement income, there is also the Home Equity Access Scheme (HEAS).
Centrelink explains that the scheme allows Australians of Age Pension age or older – or who are partnered with someone who is – to get a voluntary non-taxable loan from the government. Equity in real estate is used as security for the loan.
Participants can receive up to 150 per cent of the maximum Age Pension, including supplements, whether single or a couple, minus any Age Pension received. Since July 2022, they can also access lump sum advances.
The current interest rate is 3.95 per cent per annum. This rate compounds each fortnight on the loan balance until you repay the loan in full. The longer you take to repay the loan, the more interest will accumulate, but a no-negative-equity guarantee applies.
Department of Social Services data shows there were 9750 participants in the scheme in June 2023, compared to 6041 in June 2022 – a growth rate of about 60 per cent.
There are also commercial reverse mortgages, but Canstar editor-at-large Effie Zahos says “the government’s offering is far cheaper”.
Another option is home reversion or home sale proceeds sharing. Moneysmart explains that this allows you to sell a proportion (a ‘share’ or ‘transfer’) of the future value of your home while you live there. You get a lump sum, and keep the remaining proportion of your home equity.
Specialists say that converting a property to dual occupancy enables an owner to live in one half and rent, or sell, the other.
Be warned, because that is complicated and the Australian Securities and Investments Commission (ASIC) says to be sure to check the tax impact and whether it will affect your government benefits.
Have you changed your mind about the downsizing-to-super scheme or the Home Equity Access Scheme? Share your thoughts in the comments section below.
Also read: What evidence do you need for downsizer contributions?
I note the statement from Michael Blythe – former economist at CBA and now in a number of roles including Economist in Residence at Downsizer.com.
“An extra $20,000 per annum”. If as a couple you already have $400,000 in super, you would lose all age pension entitlements of $42,000 per annum. With indexing, that would amount to over $500,000 over 10 years.
And if you downsize from a house growing at 5% per annum to an apartment appreciating a 2% , that’s a lot of lost growth
Re Home Reversion Scheme – that’s the dearest of all equity release options.
“If as a couple you already have $400,000 in super, you would lose all age pension entitlements of $42,000 per annum.” Huh??? If you already had 400K you would lose SOME pension depending on how much you added, if you had say 100k super you add 500k, that’s 600k, you still get some pension. The 20K figure quited is a maximum possiblity.