Downsize your home, upsize your super

The decision to downsize from the family home can involve a mix of emotional and practical considerations. While the motivator is often a lifestyle change, whether that be to have less maintenance, needing less space, or to be closer to children, there are also significant financial incentives for retirees worth considering.

What is the Downsizer Super Contribution?

The Downsizer Super Contribution is an initiative by the Australian Government designed to encourage older Australians to downsize their homes and boost their retirement savings.

Introduced as part of a range of superannuation reforms in 2018, it allows eligible individuals over age 55 to contribute up to $300,000 per person, or $600,000 per couple, from the sale of their primary residence into their superannuation fund.

Interestingly, you do not actually have to buy a smaller or cheaper home to take advantage of the downsizer super contribution. The act of selling your home, provided you meet the eligibility criteria, allows you to make the contribution provided you do so within 90 days of settlement. For a full list of the eligibility criteria visit the ATO website.

Benefits of the Downsizer Contribution

• Boost Retirement Savings: The most apparent advantage is the ability to add a significant amount to your superannuation, which can then earn income and grow in a lower taxed environment and offer a tax-free income stream during retirement.
  • Further, even if only one member of a couple owns the home, both people can make a downsizer contribution potentially providing a boost to their super balance of $600,000. For a 65 year-old couple, this could provide an additional $30,000 in tax-free retirement income.
• No Contribution Cap Restrictions: The downsizer contribution is not subject to the standard superannuation contribution caps, making it an effective way to increase your retirement savings without facing penalties or limits.
• No Work Test: People over 67 are usually required to meet a work test to make voluntary contributions to super. Those over 75 can’t make voluntary contributions at all. However, the downsizer contribution bypasses these rules, giving older Australians more flexibility to contribute money to super.

Hidden opportunities

The simplest scenario is where downsizing to a home of lesser value allows someone to contribute up to $300,000 of the proceeds to super. However, with current property prices, a smaller home doesn’t necessarily mean a cheaper home. Even if this is the case and you downsized to a home of equal value, there are opportunities to utilise the Downsizer Super Contribution. Some of these strategies include:

Potential Downsides

1. Aged Pension impact: While the Downsizer Contribution helps boost super, individuals need to be mindful that any amount contributed to super may affect their eligibility for the Age Pension. The additional wealth in super may push them over the asset thresholds, which may reduce or eliminate Age Pension entitlements.
2. One-Time Use: The scheme can only be used once, limiting its long-term flexibility. Once you’ve made the Downsizer Contribution, you cannot access the same benefit for another property sale.
3. Impact on Transfer Balance Cap: For those eligible to transfer their downsizer contribution to a retirement pension, this will utilise some or all of their remaining pension balance transfer cap.

Plan ahead

The strategies surrounding the Downsizer Contribution are complex and require working through various elements. Careful planning is also required, especially for those who are eligible for the Age Pension, as the contribution could impact their entitlements. However, despite the complexity, it’s worth considering given the Downsizer Contribution for most retirees, will be the last opportunity to boost or improve the structure of their super.