In the 2017-18 Budget, the government announced that, from 1 July 2018, an eligible person could make a downsizer contribution into his or her superannuation. Federal Treasurer Josh Frydenberg announced an important change to the scheme in the 2021 Budget that makes it available to more Australians.
You are eligible to make a downsizing contribution if:
- you are aged 60 or older (previously 65) at the time you make the contribution
- the contribution is from the proceeds of selling your home on or after 1 July 2018
- your home was owned by you or your spouse for 10 years or more prior to the sale
- your home is in Australia and is not a caravan, houseboat or other mobile home
- the proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption
- you have not previously made a downsizer contribution to your super.
How much can you contribute?
Individuals – singles and both members of a couple – can contribute up to $300,000 to their super. It is regarded as a non-concessional contribution, will not count towards the contributions caps and can still be made even if the total super balance is greater than $1.6 million.
Costs to consider
Actuaries Institute fellow and author John De Ravin writes in his book, Slow and Steady: 100 wealth building strategies for all ages, that when estimating the financial impact of downsizing, you need to allow for the expenses of selling and buying.
“Typical selling expenses are in the order of 3 per cent to 5 per cent of the sale proceeds – the main items are commission (often 1.5 per cent to 2 per cent) and the expenses of preparing the property and the marketing campaign, but there are also other expenses such as legal/conveyancing expenses and removalists,” he writes.
“Typical buying expenses are of the order of 5 per cent to 7 per cent of the purchase price of the property with the main expense being stamp duty, and minor expenses being legal expenses, the cost of inspections and mortgage-related expenses.”
To downsize or not to downsize?
Obviously, anyone whose family has moved out would consider downsizing – especially if maintenance of the home and garden is becoming a burden.
And if there is a fear that the nest egg is unlikely to provide the desired retirement lifestyle, a downsizer contribution is valuable. So are older Australians using the downsizer strategy?
As of July 2020, only 14,712 of four million Australians had taken up the scheme, domain.com reports.
“If the scheme had been successful, we would have seen larger numbers,” says Grattan Institute economist Brendan Coates, adding that financial motivation is not the reason people downsize.
The Productivity Commission (PC) says 83 per cent of Australia’s five million people aged over 60 want to age in their homes, choosing “location, size and emotional ties over downsizing, right-sizing or retirement communities”.
Mr Coates says people will only move to a smaller home if they must, for practical reasons such as not being able to cope with a big garden or stairs. And when they do move, they often want to stay nearby.
Abolishing stamp duty and including more of the home in the assets test for the Age Pension would likely do more to encourage people to downsize, he says.
YourLifeChoices reported last month that the housing boom was further slowing the rate at which Australians were downsizing, with many older homeowners preferring to stay in their homes for longer due to rapidly rising property prices. The trend was being labelled ‘the other FOMO’ – or Fear Of Moving Out.
A Global Centre for Modern Ageing study found eight in 10 seniors wanted to stay in their home for as long as possible and three in four wanted to stay in their home even if circumstances changed and help was required.
Given the final report of the aged care royal commission, many baby boomers are determined to keep the family home in order to avoid aged care facilities.
Read more: What to ditch when downsizing
Taking a contrary view, an analysis of an Australian Housing Aspirations (AHA) survey found that downsizing was an “integral part of the current and future housing preferences of older Australians”.
Of the 2422 older (aged 55-plus) respondents to the AHA survey, 26 per cent had downsized and a further 29 per cent had considered downsizing.
Australians who had downsized had done so to achieve a particular lifestyle (27 per cent), for financial outcomes (27 per cent), because their garden or property required too much maintenance (18 per cent) or because they were forced to do so (15 per cent).
Of potential downsizers, 40 per cent said they would be likely to move if there were suitable housing in their preferred locations.
A report prepared by Downsizing.com.au took the view that the booming housing market was making downsizing an increasingly lucrative tactic in helping over 50s secure their financial future.
It said the average amount released in downsizing from a house to a retirement village in 2020 was $286,810.
Downsizing.com.au CEO Amanda Graham said that between 2015 and 2020, the median price of houses that sold in the same neighbourhood as retirement village units jumped by 25.7 per cent, compared to 20.3 per cent for the retirement village units.
She said the report showed that downsizing had increasing potential to allow over 50s to release equity from their home and boost their retirement income.
“Traditionally, people have downsized because of lifestyle reasons or because they want to reduce their amount of home maintenance,” Ms Graham said.
“Surging Australian house prices, and the rise in mortgage levels, have meant that a new breed of downsizers are also motivated to release equity from their home to help set themselves up for retirement. This trend should be welcomed and encouraged.”
The report identified policy and regulatory barriers that may prevent some homeowners from downsizing, including stamp duties, restrictions on housing supply and the Age Pension assets and means tests.
While the family home is exempt from the assets test, the proceeds of sale from the home are not.
The report’s release comes after the publication of the federal government’s Retirement Income Review (RIR) in November 2020, which stated that home ownership and equity release was an important but under recognised element of retirement security.
The RIR found that very few retirees were using the equity in their home to improve their standard of living.
Ms Graham said the NSW government was looking at stamp duty reform to help remove one potential equity release barrier for downsizers, while the ACT government had committed to reducing stamp duty rates.
Does the change to the downsizer contribution assist you? Have you downsized or are you considering downsizing? What advice do you have?
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Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.