How homeowners can boost their super

The downsizer contribution was announced in the 2017-18 Federal Budget. Janelle Ward reports on the uptake of the scheme, its supporters and critics.

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. You are eligible to make a downsizing contribution if:

• you are aged 65 or older 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.

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.”

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 Of potential downsizers, 40 per cent said they Australians aged over 65 had taken up the scheme, would be likely to move if there was suitable housing domain.com reports. in their preferred locations. “If the scheme had been successful, we would A report prepared by Downsizing.com.au took the have seen larger numbers,” says Grattan Institute view that the booming housing market was making economist Brendan Coates, adding that financial downsizing an increasingly lucrative tactic in helping motivation is not the reason people downsize. over 50s secure their financial future. It said the The Productivity Commission (PC) says 83 per cent of Australia’s five million people aged over 60 average amount released in downsizing from a house to a retirement village in 2020 was $286,810. want to age in their homes, choosing “location, size Downsizing.com.au CEO Amanda Graham said that and emotional ties over downsizing, right-sizing or between 2015 and 2020, the median price of houses retirement communities”. that sold in the same neighbourhood as retirement Mr Coates says people will only move to a smaller home if they must, for practical reasons such as ‘Abolishing stamp duty village units jumped by 25.7 per cent, compared to 20.3 per cent for the retirement village units. not being able to cope with a big and including more of She said the report showed that garden or stairs. And when they do move, they often want to stay the home in the assets downsizing had increasing potential to allow over 50s to release equity nearby. test for the Age Pension from their home and boost their Abolishing stamp duty and including would likely do more retirement income. more of the home in the assets test for the Age Pension would likely to encourage people to “Traditionally, people have downsized because of lifestyle do more to encourage people to downsize.’ reasons or because they want downsize, he says. to reduce their amount of home YourLifeChoices reported last maintenance,” Ms Graham said. month that the housing boom was further slowing “Surging Australian house prices, and the rise in the rate at which Australians were downsizing, mortgage levels, have meant that a new breed of with many older homeowners preferring to stay in downsizers are also motivated to release equity from their homes for longer due to rapidly rising property their home to help set themselves up for retirement. prices. The trend was being labelled ‘the other This trend should be welcomed and encouraged.” FOMO’ – or Fear Of Moving Out. The report identified policy and regulatory barriers A Global Centre for Modern Ageing study found that may prevent some homeowners from eight in 10 seniors wanted to stay in their current downsizing, including stamp duties, restrictions on home for as long as possible and three in four housing supply and the Age Pension assets and wanted to stay in their current home even if means tests. circumstances changed and help was required. While the family home is exempt from the assets Given the final report of the aged care royal test, the proceeds of sale from the home are not. commission, many baby boomers are determined to keep the family home in order to avoid aged care The report’s release comes after the publication of facilities. the federal government’s Retirement Income Review (RIR) in November 2020, which stated that home Taking a contrary view, an analysis of an Australian ownership and equity release was an important but Housing Aspirations (AHA) survey found that under recognised element of retirement security. downsizing was an “integral part of the current and future housing preferences of older Australians”. The RIR found that very few retirees were using the equity in their home to improve their standard of living. Of the 2422 older (aged 55-plus) respondents to the AHA survey, 26 per cent had downsized and a Ms Graham said the NSW government was looking at further 29 per cent had considered downsizing. stamp duty reform to help remove one potential equity release barrier for downsizers, while the ACT government Australians who had downsized had done so had committed to reducing stamp duty rates. to achieve a particular lifestyle (27 per cent), for financial outcomes (27 per cent), because their DISCLAIMER: All content in the Retirement affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been garden or property required too much maintenance prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. (18 per cent) or because they were forced to do so (15 per cent). 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.