Are you considering downsizing but feeling unsure about how to approach your finances or superannuation?
We’ve asked Australia’s most trusted finance writer, Noel Whittaker, all about downsizing, and downsizer contributions, to make sure you have the right tools in your belt to tackle this complex topic, with ease. Asking Noel about downsizer contributions, he first wanted to clarify downsizing as a whole.
Downsizer contribution is an initiative that allows each individual to contribute $300,000 to their superannuation account, if it comes from the proceeds of a house sale. According to the Retiring Income Review, “few retirees use the equity in their home to support their standard of living in retirement”.
Downsizer contributions are a fantastic way to plan for your future, as they allow you to contribute to your superannuation no matter your outcome on the ‘work test’ (which tests whether you work 40 hours in a 30-day period), or your work test exemption status. There is no work test until the age of 67. Between 67 and 75, no concessional contributions can be made without passing the work test, but non-concessional contributions can be made with no work test.
“The age [to make a downsizer contribution] is going down from 65 to 60, from July 2022,” said Noel.
“Just bear in mind that if you’re 62 now, you could still put the proceeds into super, as long as your balance is not over $1.7 million. So if a couple has got $1 million in super between them and they can split that as half each, which they could do, then they can put $300,000 each into superannuation in any event, without using downsizer contribution. Which is pretty cunning, because that means they haven’t used up their downsizer contribution, so if they move again, they could do it again, and this time use it.”
Noel then spoke to the point of weighing up your options before making downsizer contributions, saying:
“Well it’s got to be done within 90 days from the settlement date, or receiving the proceeds. What you really need to do is make sure that you satisfy the criteria, which I think is living in the house for a certain time, 10 years. If you’re a couple and the house is owned by one person, they can still each make the contribution.”
“You can still make the contribution even if you’re upsizing or buying a more expensive property. I don’t think most people would do it, you’re upsizing as you’re working your way up the corporate ladder, the downsizing after you retire. However, if you’re buying a dearer house – can I still make a downsizer contribution? The answer is yes.”
“Let’s talk about downsizing perse right. It’s a very big move. Because it’s gonna cost you at least $100k in moving costs, at least but if you’re going to do it, you’re better off doing it sooner rather than later. If you wait until your house needs repairs, then you find you’ll spend maybe $50k on the house to make it saleable.”
Noel outlined that the next thing to do is to note the practical impact downsizing decisions will have on your life.
“Next thing is, it’s well known that moving away from your social network is a major step. Social network is a major part of a happy retirement. Your social network will tend to come from your school, your job, your sport, and your church maybe. If you suddenly leave Sydney and go to Perth – you’re retired, you’ve got no friends, and you can find yourself friendless.”
“The next thing is that you need to watch the social security implications. Which means that your house is exempt. If you’ve got a $1.2million house, you might be on the full pension. If you downsize and release $500,000 into your superannuation (which is counted, for pension purposes), you may lose a huge amount of pension.”
Noel outlined that there are three factors to be very careful of when considering:
“It’s also very very important to understand that you buy and sell in the same market. You don’t want to rush out, sign an unconditional contract, and sell yours, because you could be caught. There’s heaps of people sell, then they think they’ll look around. And they might miss out, and that’s a major problem, you need to be very sure that what you want is available.”
“I mean, I’ve moved a couple of times in my life, and when you start to look, there’s not a lot that fits your criteria. There really isn’t.
“The latest thing that is not well publicised is that there’s a move to electric vehicles. Now, most apartments don’t have the provision to charge your electric vehicle. This should be another major issue when you’re looking. Where the hell are you gonna charge it? These are little practical tips, that’s all.”
“If you’re gonna downsize, the government now expect that you use the equity from your home to live on. If you downsize. There are certain types of retirement villages where you can’t take out a reverse mortgage. So if there is not a lot of money coming out from downsizing, which may be well possible. Some people downsize to get their finances in order.”
“If you move to a Lendlease community, no lender will take those properties (the land lease properties) as security for a reverse mortgage loan.”
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.