Changes to superannuation policies will take effect from July 2018, and the jury is out on whether they will help retirees wanting to downsize.
New superannuation rules could be the key for some seniors who want to downsize from their family home to something smaller and release equity to fund their retirement.
They will have to crunch the numbers, however, amid reservations about the revamp.
From 1 July 2018, people aged 65 and over will be able to sell the family home and make an after-tax contribution into their super of up to A$300,000, or A$600,000 for couples.
This applies even if their super balance exceeds the A$1.6 million cap, and is intended to encourage baby boomers to downsize to free up larger homes for younger families. Income earned from these contributions will be taxed at just 15 per cent within the superannuation system (or be free of tax if rolled into a retirement income stream) rather than being subject to normal marginal tax rates.
“The age and work restrictions that currently apply to super contributions in the 65-75 age bracket just won’t apply to these types of contributions,” says Michael Hallinan, special counsel superannuation at Townsends Business & Corporate Lawyers.
Consider pension consequences when downsizing
The chief concern about the new rules is the impact they could have on retirees receiving the Age Pension or Department of Veterans’ Affairs benefits, because the contributions will be counted for relevant asset and income tests.
Hallinan says when downsizers sell their home they will be turning a non-assessable asset – the family home – into an asset that sits in the accumulation side, not the pension side, of a super fund. That could result in loss or reduction of the pension.
“That’s the big downside,” Hallinan says. “The people it’s intended to most benefit are those who are going to be dependent on Centrelink, and by undertaking these contributions, they’re going to make their Centrelink position worse.”
Who will benefit from new downsizing rules?
Hallinan believes the new contribution option is only attractive to people who are asset rich, and therefore excluded from pension benefits under the asset test, “and who have not exhausted their A$1.6 million value in the super system”.
CPA Australia head of policy Paul Drum FCPA says pension implications and the reality that many downsizers will buy a smaller but similarly priced property in a nicer suburb or location – diminishing any retirement nest egg – means seniors should do their homework.
“They don’t end up better off in a net position. So they need to give a lot of thought to why they’re downsizing.”
Issues to consider include the broader financial and social implications of downsizing, any possible tax or social security repercussions, and the ability to receive a pension from their super fund.
Drum believes the government initiative is a “largely tokenistic” move to give the appearance of addressing housing affordability. He notes, too, that some senior Australians may already be able to earn income from investments without paying tax if they are eligible for the seniors and pensioners tax offset (SAPTO). Under the offset, couples can earn up to A$57,948 a year tax free, and individuals up to A$28,974.
Pensions - the $1.6m transfer balance cap: this recorded webinar will focus on the Government’s changes to the pension rules that came into effect on 1 July 2017.
What retirees need to consider when downsizing
While acknowledging the intent of the new super rules, Keith Yeo FCPA, a member of the CPA Australia Third Age Network of retired or semi-retired professionals, urges retirees to factor in a range of financial and social factors when deciding whether to downsize. The checklist should include superannuation, home equity, assets such as term deposits and shares, potential pension benefits, and personal considerations.
“You must take a holistic look at all options to maximise both a life plan and a financial plan,” Yeo says.
He believes retirees’ determination to stay in a much-loved family home can place a burden on younger members of the family who have to attend to parents’ care needs and property maintenance.
“Such independence for older people normally comes at the cost of their children or somebody else,” he says.
Yeo adds that even though the new super rules may cause pension complications, “it’s no good freeing up A$300,000 if you’re going to lose most of your pension.”
Retirees should appreciate that a smaller property will probably cost less to maintain and have lower energy and insurance bills.
Most importantly, he says, retirees and their families should have early conversations to plan any downsizing move.
“Too often people leave it too late and that’s when they become vulnerable.”
Seek financial advice when downsizing
Some critics of the new super rules believe retirees may be better off, given rising property prices, staying in their home, accessing in-home care services and cashing in later.
Hallinan sees the potential financial merit of staying in the family home rather than trying to navigate the super rule changes.
“[The changes] are only going to be worthwhile if they’re not Centrelink people … I’m not sure if it would be wise to sell the family house simply in order to have the ability to make these new super contributions. You don’t want the tail wagging the dog.”
Drum says any downsizing decision will be difficult. He urges retirees and their families to seek advice from financial experts.
“There are so many complexities that you need to consider. It’s a very hard decision to make without some financial and tax advice.”
Key features of the new super rules
- If a person has reached their A$1.6 million transfer balance cap, any downsizing contribution must remain in accumulation phase, and will be subject to 15 per cent tax on earnings.
- Contributions under the downsizing rules have to be made within 90 days of the disposal of a property, which must have been held for 10 years.
- The existing work test for voluntary contributions made by Australians aged 65-74 do not apply to downsizing contributions. Currently, people in this age group need to prove they worked for 40 hours within a 30-day period to make a super contribution.
Reverse mortgages can be useful, but take care