Q: I’m 65 and my wife is 66. We’re looking at downsizing at the end of the year and have contracted off-plan to purchase an apartment that is currently under construction. We’re in the fortunate position of having both reached the age of release in relation to our self-managed super funds (SMSF) and plan to pay for the unit using money from our super funds prior to selling our home, then basically replacing a majority of the funds back into super via the downsizing initiative i.e. $300,000 for each contribution, from the proceeds of our home sale once it has completed.
We want to be able to move into the unit but we’re unsure whether this move will suit us, given its size and the fact we have never lived in an apartment situation before. So, we want the option of retaining our home as a fallback strategy for at least three months following the move into the apartment. The issue we have is that our super balances are heavily in my favour to the tune of $2.2 million, (basically $1.6 million account-based pension and $600,000 in accumulation phase) versus $150,000 (account-based pension) for my wife.
When accessing the funds of $1 million to settle the apartment, keeping in mind we may or may not take to apartment dwelling and so may or may not replace the $600,000 with the funds we receive from the sale of our home, to pay for the unit, can we access $600,000 from the accumulation phase funds first and make up the $400,000 from the account-based pension funds, to maximise tax-effectiveness?
Then, when/if our home is sold and we want to contribute back under the downsizing rule equally, can I make my contribution back to my account-based pension account or are there rules relating to not being able to top-up once funds have been withdrawn from the account-based pension account?
A: This is a very interesting question and there are a number of complexities involved, some of which you have already identified.
Before I even consider some of the specific issues you have raised, I wonder whether you have considered another strategy for managing your circumstances, particularly as you are uncertain about whether or not you may ultimately sell your home. The problem, of course, is that if you withdraw the money from superannuation to fund the purchase of the apartment and then decide it does not work, it will be extremely difficult if not impossible to return money into the super fund without also selling your home.
If the plan is to return to your current home, you will then have $1 million ‘trapped’ outside the superannuation system. An alternative is to consider bridging finance for the purchase of the apartment. Normally obtaining this type of finance is difficult for someone in your age bracket, however, where a financier (or mortgage broker) can see that there are funds in superannuation which are accessible to repay the loan, such finance may be available.
Interest rates are the lowest they have ever been for these types of borrowings and the cost of interest over a three-to-six month period would be minimal and be offset by the earnings continued to be received by the money still invested within the superannuation fund. If after a period of time you decide you are comfortable with apartment living, you then can utilise funds from a combination of the sale proceeds of the house and withdrawal from super to repay the bridging loan. A downsizing top-up my also be possible in this case.
If you decide, however, that you do not want the apartment, you can put it on the market and use its sale proceeds to repay the bridging loan in due course.
I feel this strategy is less complicated and risky relative to settling the cost of the apartment from your superannuation accounts. I have spoken to a mortgage broker and they have confirmed that they would be able to arrange finance in these circumstances.
Of course, you would be aware of the significant buying and selling costs associated with acquiring and then disposing of the apartment in the short term. In your circumstances, I would have ‘tested the waters’ by renting an apartment for three to six months in my preferred location to see if it suited my lifestyle rather than acquiring one. However, as they say, hindsight is a wonderful thing.
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