For many Aussies getting ready for retirement, downsizing the family home seems like a pretty logical next step. But before you make the move, you should sit down and think about what your own goals and circumstances are. Less maintenance, lower expenses, and more freedom to do the things you enjoy – it’s a tempting prospect.
Financial planning is not just for the wealthy – it’s a must for anyone looking to take control of their financial future.
Now, while downsizing has a lot of benefits, there’s also a financial opportunity to be aware of: using the money from selling your home to boost your super in a tax-efficient way – but there are some things to think about before you do.
As part of a bigger financial planning strategy, one benefit of downsizing is the potential to unlock the value of your home and make you more secure financially for the long-term.
The upsides: Downsizing into super can be a no-brainer
A super boost that can make a big difference
Since January 2023, Aussies aged 55 and over who sell their home can put up to $300,000 of that money into super, which means up to $600,000 for couples.
To be eligible:
- You must be at least 55
- You (or your spouse) must have owned the home for at least 10 years
- The sale itself will have to be at least partially exempt from Capital Gains Tax (usually your main residence)
- You need to make the contribution within 90 days of the sale (with some flexibility on the deadline)
- You can’t have made a downsizer contribution before
- You’ll need to get the right form to your super fund
There are a few conditions to watch out for, so it’s worth getting some advice from a licensed financial adviser to make sure you comply with the rules. Always check with your super fund to make sure they’ve got the contribution from you.
No impact on contribution limits
Downsizer contributions are an exception to the usual super contribution limits. That means they won’t affect how much you can put in under the normal rules – which can be a real bonus if you’ve already maxed out other options. While there’s no cap on downsizer contributions, you should still consider any other fees that might apply.
You’re not too old to take advantage
Most super contributions stop at 75, but that’s not the case with downsizer contributions. That means older Aussies have another way to get some money into super and make the most of the tax breaks.
Tax efficiency
Super is one of the most tax-efficient investments out there – and it’s still pretty attractive even after all these years.
- earnings are taxed at 15% in the accumulation phase (making tax a big consideration for financial planning)
- once you’re in pension phase, earnings and withdrawals are usually tax-free
This can make a real difference to your long-term returns – and that’s why tax planning is one of the five key areas of financial planning.
The trade-offs: Things to watch out for
What happens to the Age Pension
Your family home is exempt from the Centrelink asset test, but the money from selling it isn’t.
If you move money into super (especially if you’re already on the pension), it could:
- count towards the asset test
- be treated as income
This can affect your eligibility for a full or part Age Pension.
Getting access to your super
Super isn’t always easily accessible. You generally need to:
- retire and reach your preservation age, or
- turn 65
Until then, it’s a good idea to keep some money in a liquid account for emergencies. Building an emergency fund usually means saving 3-6 months of expenses in an account that’s easy to get to.
If you’re not there yet, you could be locked out of your super for a while.
Investment risk
Super funds usually spread their investments across a range of markets, like shares. While this helps growth in the long run, it also means there’s some risk involved. Investing wisely and spreading your investments across different types of assets can help manage that risk. Before you make any investment decisions, think about how much market volatility you can handle – and make sure your investment strategy reflects that.
If you’re really risk-averse, you might prefer stable but less tax-efficient options like cash or term deposits.
Estate planning considerations:
Your home can often be left to loved ones tax-free – which is a nice legacy to leave behind. But Super is a different story.
Estate planning is a big part of the five core areas of financial planning – and one of the main benefits is making sure your estate is working its best to hand down the maximum amount of cash to your beneficiaries without breaking the bank with unnecessary taxes. Getting some proper advice from a professional can really help make sure your estate is all structured right, and you’re not missing out on any special tax breaks.
How you pass on your super and how it’s set up can make a difference in the tax your beneficiaries will have to pay:
- They could be looking at up to 17% in tax (taxed element)
- Or up to 32% (untaxed element)
That can have a pretty big impact on the wealth you’re leaving behind.
Fees and charges: Don’t get caught out by the hidden costs of downsizing and super contributions
When you’re planning to downsize and boost your super, the focus can easily end up being on the good bits and forgetting all the sneaky fees and charges that are quietly eating away at your savings. In Australia, every super fund has its own set of admin fees, investment fees and sometimes other charges that can really make a difference to your super balance over time. For example, high admin fees can really whittle away at your returns and leave you with less money to live on in retirement, which is not what you want.
Industry experts reckon you should take a close look at your super fund’s fee structure before making any big decisions. Compare the admin fees, investment fees and insurance premiums across different funds to make sure you’re not getting ripped off. Keep in mind, fees are only half the story – investment performance, risk management and the type of insurance on offer are also super important for your financial future.
When you make super contributions from downsizing, you should also keep an eye out for any additional charges or transfer fees that might pop up. Even small differences in fees can add up over the years, so it makes sense to take the time to work out what you’re really paying for. By doing your homework and staying in the know, you can really make your super grow and get the best out of your retirement planning.
It’s not just about the money – it’s how it makes you feel
Downsizing isn’t just a numbers game.
A smaller home might mean less upkeep, but it’s also going to mean:
- Less room for family visits
- Leaving a community you love
- Compromising on lifestyle if you have to move to a more expensive area
Financial advisers can really help you balance out the pros and cons – and find a solution that lines up with your long-term goals.
And another thing to keep in mind – downsizing might not free up as much cash as you expect – especially in a hot property market.
Keeping an eye on your strategy
Achieving your financial goals is a bit of a moving target – regularly reviewing and adjusting your strategy is essential. As your life circumstances change or the market gets a bit wild, your financial situation and investment accounts may need to be tweaked to make sure they’re still working towards your retirement plans.
Stay on top of your super contributions, investments and other financial decisions by setting aside a bit of time each year to review your progress. If you’re self-employed or your income is a bit unpredictable, this becomes even more important. Take into account all the fees – including tax, banking and other charges, as these can have an impact on your overall savings and what you need to pay out.
Getting some professional help from a financial adviser can really make a big difference – they can give you tailored advice to help you manage risks and create a plan that is unique to your needs. Use budgeting tools and resources to work out your contributions, investments and future needs, and make sure your plan stays on track as your life evolves.
By taking a bit of time to manage your super and your finances, you’ll be better placed to achieve your long-term goals and live a secure and comfortable retirement.
So should you be doing it?
Downsizer contributions can be a great strategy – but they come with a lot of complexity around tax, super rules, Centrelink and estate planning.
What works for one person may not work for another. Getting some professional advice is crucial to make sure your financial planning is tailored to your needs and goals.
Reach out to us before you make any changes
Before you make any decisions its a good idea to take a step back and look at the full picture – and consider the value of getting some professional advice to help make complex financial decisions.
At Insight Wealth, we help you weigh up the financial benefits against the lifestyle implications – so you can feel confident and clear in your decision-making.
Get in touch with our team to work out if downsizing is the right strategy for your retirement plan.