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Investor Insights > News > Downsize your home and boost your retirement savings
Downsize your home and boost your retirement savings
October 2024
Opinion piece by Jenneke Mills, Head of Technical Services
Thinking of downsizing your home in the lead up to retirement? If so, you could unlock the wealth in your home to grow your retirement savings.
If you're 55 or over, you may be able to make a downsizer super contribution to boost your retirement nest egg by up to $300,000 ($600,000 for couples).
A downsizer contribution is a special kind of boost to your super which uses the proceeds from the sale of your home. But here's the twist: it doesn't count towards your other annual contribution caps. You could add a significant sum to your super on top of your other contribution limits.
Also, unlike other types of super contributions, there's no work test, no maximum age limit and it does not affect your total super balance limits. This makes a downsizer contribution a great option for many people who aren't eligible to make other types of contributions. And a great way to take advantage of super's tax-effectiveness.
A few additional things to keep in mind though: a downsizer contribution can be made even if you have exceeded your contributions cap, but it will count towards your personal transfer balance cap if you use your super to open a retirement phase income stream.1 Also, your home is generally exempt from the Centrelink assets test, but super generally isn't, which could affect any entitlements you receive. If you're unsure, it might be worth talking to a financial adviser.
Here's some tips to consider when weighing up whether a downsizer contribution could benefit you.
#1: Don't overlook investment properties
Just because you're not living in the property when you sell it, doesn't mean you can't qualify for a downsizer contribution.
The property being sold needs to be treated as your main residence for some time during the ownership period for capital gains tax (CGT) purposes, but not necessarily for the entire ownership period, or even at the time of sale.
There's no minimum period that you need to have lived in the property (although you need to have owned the property for at least 10 years). Other eligibility rules apply 2 , but as a starting point, don't overlook the downsizer opportunity for investment properties!
#2: Is the downsizer contribution the best option for you?
While a downsizer contribution may sound like the obvious choice when selling a home, it's worth weighing up all your options. This might include considering whether there could be a benefit to making different types of contributions using your sale proceeds.
For example, if you're up for CGT on the sale or want to manage other personal income tax liabilities, you may be able to make a personal super contribution and claim a tax deduction, helping to boost retirement savings while also managing your tax bill. It is important to note that when you claim a tax deduction on a personal contribution, this amount claimed will then be counted towards your concessional contribution cap. On the other hand, you can't claim a tax deduction for downsizer contributions.
#3: Now or later?
If you have more than one dwelling that might qualify for a downsizer, it's worth considering the benefits of holding on to your downsizer opportunity (which is a one-off opportunity, not an annual or lifetime limit). You could instead consider making contributions using your concessional (pre-tax) contributions or non-concessional contributions caps, if eligible.
This could benefit you if you have or will have a high total super balance in the future, or you'll be over 75 when you sell the other property down the track (meaning you may not be eligible to make other types of contributions at that time). You could boost your super today, while reserving the downsizer opportunity for that later time when you may not otherwise be eligible to contribute.
#4: Maximise opportunities as a couple
Depending on the sale proceeds available to invest, making a downsizer contribution could allow a significant boost to your retirement savings as a couple.
Even if the property being sold is only in one person's name, it may be possible for both of you to make a downsizer contribution (the limit of $300,000 applies per person). This is also good to note if you're the person selling the property and you're below 55 (so don't qualify) but your partner is over 55. In this case, they could still make a downsizer contribution, if eligible.
It's important to remember though, that once a contribution is made, the money belongs to that person. So, while there are some great strategies to optimise super savings and social security benefits as a couple, ensuring that you consider your longer-term goals and objectives (including your estate planning arrangements) is critical.
While super can be split in the event of a relationship breakdown, it's not quite so simple when it comes to the distribution of your super benefits when you die. When making large super contributions, especially when you've sold a property which is likely to represent a good chunk of your wealth, consider how the sale and super contribution fits in with your overall estate planning strategy. Reviewing the terms of your Will, updating your super death benefit nominations, and ensuring you make the right arrangements to support your desire to distribute your assets to a particular person or people is an important piece of the puzzle not to overlook.
Will making a downsizer contribution impact my Age Pension entitlements?
The value of your principal place of residence is not assessed when determining your entitlements under the social security income and assets tests. Therefore, depending on what you do with the sale proceeds when you sell your home, the amount of any payments or benefits you or your partner are eligible for may reduce.
Like other types of super contributions, the ordinary rules are used to assess superannuation investments which depends on whether you, or your partner, are under or have reached Age Pension age (or Service Pension age if applicable).
If you've not yet reached the age requirement, any amount in the accumulation phase of super is exempt under both the income and assets tests.
If you have met the age requirement, your superannuation is assessed when determining your entitlements and may reduce the amount you're eligible to receive.
It's important to note that even if you're under the Age Pension age but you have a partner receiving Age Pension or another payment, commencing an income stream from your super balance might impact their entitlement. This is because for members of a couple, your combined income and assets are used to calculate entitlements.
Can you upsize instead of downsize? What if you don't want to buy a new property at all?
Despite the name, the downsizer contribution isn't available only to those who move from one house to a smaller one. There is no requirement for you to purchase another house with the money you make from selling. You can rent a new place or move into a share property or aged care facility and still make a downsizer contribution to your super.
How do I make a downsizer contribution?
On top of the basic eligibility rules, there are some important requirements when it comes to making a downsizer contribution.
You'll need to complete the downsizer contribution form and provide this to your super fund either before, or at the time you make your downsizer contribution. You'll also need to make the contribution within 90 days of the settlement of sale.
Find out more about the downsizer contribution and the eligibility requirements on the ATO website.
1The transfer balance cap limits how much you can transfer into a retirement phase income stream. The general transfer balance cap is currently $1.9 million (2024/2025) and it applies to all retirement phase income streams.
2 Eligibility requirements: Your home was owned by you or your spouse for 10 years or more before the sale – the ownership period is generally calculated from the date of settlement of purchase to the date of settlement of sale. Your home is in Australia and is not a caravan, houseboat, or other mobile home.
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