Older Australians adding thousands to super balances thanks to downsizing rule

Baby Boomers are taking advantage of a new government rule and easing financial pressure later in life by selling off their family home and boosting their super balances significantly.

While many may believe super can only be increased during a person’s working life, over-60s are learning there is more that can be done to help them live the life they want in retirement by making a change and downsizing their residence to something more suitable. By doing away with large houses, potentially now filled with empty bedrooms after the kids have moved out, and moving into a smaller and easier to manage properties, Boomers are not only reducing time consuming cleaning duties but adding to their wealth.

In fact, according to one of Australia’s largest superannuation funds QSuper, its members have contributed more than $69 million to their super by simply downsizing their family homes. And it’s more than a few dollars each, with newly released data revealing over 320 Aussies have made an average downsizer contribution of $200,000 in the past year.

This was all made possible in July of 2018, when the government introduced a new rule allowing eligible Australians aged 65 and over to sell their primary residency (which they have held for 10 years or more) and contribute up to $300,000 each from the sale of proceeds into super. The bonus, is that these contributions aren’t taxed, meaning they don’t count towards an individual’s annual contribution caps and are exempt from the $1.6 million total superannuation balance restriction.

“For older Baby Boomer who have paid off their mortgage and found themselves with an empty nest, downsizing the family home could be a logical step for some,” QSuper Chief of QInvest Kim Hughes explained. “It may give them a smaller, lower maintenance property and frees up some capital for retirement. This initiative allows them to invest some of that surplus in a tax-effective environment.”

She added: “There are many ways to add to your super during your working life, but this measure allows eligible older Australians to make a significant boost to their super balance outside of the normal restrictions such as the age and work tests and the annual contribution caps.” Over the past year alone, many Aussies across the country have made use of this new rule with 52 pent of contributions made by female and 48 per cent by males. Proving that it’s never too late to add to your balance, the average member was 72-years-old, while the oldest was 97.

However, Hughes said it is recommended to get on the bandwagon as early as possible, with a 65-year-old adding $220,000 to their super, allowing them to draw an additional tax-free income of $15,000 per year until age 88.2. But she warned while the measure has obvious benefits, it is not suitable for everyone and seeking financial advice is essential to avoid potential tax and age pension penalties.

“As the family home is not counted in the assets test for the age pension, downsizing and putting some of the sale proceeds into super or other assets could mean a reduction in an individual’s age pension payments or see them cancelled all together,” Hughes added. “While the downsizer contribution is exempt from a lot of the normal limits, the amount you can hold tax-free in a retirement account still applies. There is a cap of $1.6 million and there are penalties for going above that amount, so it could pay to get financial advice before using this measure.”

Selling up may be the best option for some with recent research showing many people across the world are lending significant amounts of money to their children and grandchildren and setting themselves up for a tough retirement. In fact, the data released by UK brand Legal and General showed how younger generations are increasingly relying on the ‘bank of mum and dad’ to scoop up enough cash for their own home deposits and parents aren’t thinking about how this will impact their retirement.

The figures revealed that thousands of over-55s people across the United Kingdom have already joined the ‘bank of mum and dad’ to help their children and grandchildren become homeowners and that older people are becoming increasingly generous when it comes to their giving. For example, over-55s are now giving an average of £24,100 (AU $43,485, US $29,300) to their kids. That’s an increase of more than £6,000.

Meanwhile, 56 per cent of over-55s are giving money to their younger family members because it’s “a nice thing to do”. The research showed that many people are dipping into their own cash savings, pensions and retirement income to give money to their children and grandchildren and may not realise this could significantly change their own retirement plans.

It was found that 55 per cent of over-55s who offered to help a younger family member had to cut back as a result and accepted a lower standard of living after they offered help. What’s more is 26 per cent of people admitted they didn’t think they had enough money to last retirement because they helped their kids or grandchildren and 16 per cent said they were relying on a lifetime mortgage to help others out.