The Superannuation Downsizer incentive which commenced on 1 July 2018 has enabled over 36,000 people aged 65+ to contribute up to $300,000 from the sale of their home to their superannuation. So far more than $9.5bn dollars has been contributed through the scheme with more than 55% of contributors being women.
Under the current rules you must:
- be aged 65+
- have owned your home for at least 10 years (and be entitled to the CGT main residence exemption)
- contribute within 90 days of settlement (using the downsizer contribution form)
It’s important to note that you cannot contribute more than the proceeds of sale from your home and downsizer contributions can’t be made if the home you are selling is a caravan, houseboat or motorhome. You also cannot contribute if you have made a downsizer contribution previously.
On Sunday Scott Morrison announced that from 1 July this year the qualifying age for downsizer contributions will drop from 65 to 55 and a 2-year pension asset test exemption will be introduced.
The changes could provide substantial short-term benefits to pensioners and longer-term benefits for couples with an age gap. You see once you reach age pension age your superannuation is assessable for both the assets and income test when calculating your Age pension entitlement. Under the current rules if you are 65 you can make a downsizer contribution today but when you become eligible for age pension at age 66.5 or 67 (depending on when you were born) the contribution may reduce your pension entitlement. If you have a spouse who is younger, say 55, they are not eligible to make a downsizer contribution.
Under the new rules if you have a younger spouse (55+) you may choose to pay some or all of the downsizer contribution (up to the $300,000 limit) to their superannuation, keeping it exempt from your pension until they reach pension age.
Let’s look at an example.
Jack (67) and Margaret (55) are downsizing from their family home that they have lived in for the last 25 years.
Their home is worth $1million and they will pay $700,000 for their new home. They have $350,000 in a combination of investments and Jack’s superannuation and personal assets worth $50,000.
Jack currently receives an Age pension of $744.40 per fortnight/$19,354 per year
Under the current rules Margaret is not eligible to make a downsizer contribution so it would need to be made by Jack and would be included in his Age pension means test.
Under the new rules either Jack or Margaret could make the contribution. If Jack makes the contribution it will be exempt for the first 2 years after which his pension would reduce to around $302 per fortnight/$7,849 per year.
If Margaret makes the contribution the $300,000 would remain an exempt asset until she reaches age pension age at 67.
Having Margaret make the downsizer contribution could mean an extra $11,505 per year of pension for Jack for the next 12 years, a benefit of around $115,000 over Jack making the contribution.
For people already receiving an Age pension the potential benefit of the 2-year asset test exemption is $46,800 for singles who contribute $300,000 and $77,418 for couples who contribute $600,000.
Whether making a downsizer contribution is a good idea or not is going to depend on a host of factors. How much Age Pension you or your spouse can claim during the asset test exempt period and when the exemption runs out is just one factor, you also need to consider tax, cash flow, estate planning and the financial implications of your new downsized home. It’s worth seeking specialist advice.
About the Author
Rachel’s engaging explanations of the in’s and out’s of financing retirement living and aged care are embraced by thousands of readers of the Sydney Morning Herald, Melbourne’s The Age and the Brisbane Times newspapers.
She has co-authored a number of books including the best-seller Aged Care, Who Cares? and Downsizing Made Simple.
Rachel heard many downsizers (including her own Grandmother) say “my only regret is not moving sooner”, she knew she could help by removing the financial confusion. In 2021 she developed the Village Guru software which enables retirement communities to clearly show prospective residents the village costs together with an estimate of their pension, rent assistance and home care fees.
Rachel holds a Masters in Financial Planning.
*The information contained in this article is general in nature and does not take into account any person’s individual objectives, financial situation or needs. It is not intended to imply any recommendation, opinion or advice. You should seek advice from a qualified professional about your particular financial situation, needs and objectives.