How to make the most of the downsizer super contribution
The family home has long been regarded as the cornerstone of wealth creation in Australia. Not only does home ownership give you permanent shelter, it also gives you a valuable asset that will appreciate over time and the ability to live comfortably later in life.
That's why financial planners waste no time in urging clients to own their own home and ensure that it's paid off before retirement. Favourable government treatment of the home provides retirees with financial benefits that are not available to renters.
"Retirees who own their own home outright have the biggest advantage because they've got permanent housing, and the equity in their home can provide an additional source of retirement income," says Ian Henschke, chief advocate for National Seniors Australia.
One way to give your super one last big hit is the downsizer contribution. But, as always, there are many rules to navigate and the consequences of getting it wrong can be costly. You might want to consider seeking financial advice beforehand.
The downsizer contribution was introduced a few years ago to help those who hadn't been in the super system long enough to benefit from it.
The federal government hoped it would also encourage retirees to downsize from homes that no longer met their needs and free them up for younger families with children.
The downsizer rule allows people over 55 to contribute up to $300,000 per person, or $600,000 per couple, from the proceeds of selling their home. The home must have been owned for more than 10 years and it doesn't have to be in both partners' names.
There is no upper age limit - once you turn 75 you can't make voluntary contributions - and you can make the downsizer contribution in addition to the other contributions. You can only ever make one downsizer contribution.
It must be made within 90 days of settlement and you are required to fill in a tax office form and submit it to your super fund with, or before, the contribution.
There's no obligation to buy a less expensive home. You may have sold an investment property or inherited money and can use the cash, plus what's left over from the downsizer contribution, to trade up to a more expensive home.
There are transaction costs involved - agent's fees, conveyancing costs, stamp duty and relocation expenses - so you need to do the maths to see if your plan stacks up.
Avoid this "nightmare"
Certified financial planner Marisa Broome, principal of Wealthadvice, says not all super funds are good at handling the downsizer contribution.
She recently helped elderly clients who had already gone through their super, didn't have a super account and wanted to make the downsizer contribution.
"Trying to find a super fund somewhere, to put the money into super, was a nightmare because they were over 75. They were legally allowed to do so under the downsizer legislation. We were eventually able do it manually, but we couldn't do it online."
Broome says super funds need to build the downsizer contribution into their online system and make it easier for people to navigate and upload the necessary documentation, such as the contract of sale and the ATO form, and then open an account.
"The funds are focused on accumulation for young people and not thinking through this other very powerful segment of the market, which is the downsizer contribution segment."
In the light of this saga, you may wish to speak to your super fund well in advance of any plans to make a downsizer contribution and establish whether it is able to handle the transaction properly.
For those who own a home but don't have much in the way of super or other assets and are struggling to live on the pension alone, the government's Home Equity Access Scheme may be worth considering, says Henschke.
Once you reach pension age, homeowners, including self-funded retirees, can use the equity in their home to borrow up to 1.5 times the maximum age pension paid fortnightly, or as a lump sum, capped at 50% of the annual age pension.
The loan has an interest rate of 3.95% and is lower than most reverse mortgages. The government recovers the loan amount, plus interest, when the last borrower leaves or dies.
For more information, see servicesaustralia.gov.au/home-equity-access-scheme.
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