16 May 2017
A budget measure that allows downsizers to put more into their super will likely see Irene and Tom Han sell their family home.
The retirees live in a five-bedroom family home near Castle Hill in north-west Sydney and have been talking about downsizing for the past five years.
Under the measure, from July 1, 2018, those aged 65 and over will be able to downsize their family home and place proceeds up to $300,000 each into their superannuation fund.
The measure will apply to a principal place of residence held for a minimum of 10 years. This will apply to both members of a couple for the same home. Provided they are 65 and over, they can put a combined $600,000 into super.
Irene, 65, a former chief executive of a disability services company and Tom, 76, a former accountant who moved into management, are fully self-funded retirees who also own an investment property on the Gold Coast.
“The home is just not required any more,” Irene says.
Irene says that she and Tom are not into gardening and then there’s the time spent cleaning a large house and the costs of maintaining the house and utilities.
“I don’t want to spend my life cleaning; there are more interesting things in life,” she says. “It gives us options. We would have preferred to get a reduction on stamp duty to downsize, which would have been something that everyone could have benefited from.”
While Irene and Tom enjoy a comfortable retirement, for the more than 80 per cent of retirees who own their own home, many don’t have that much in super.
According to Association of Superannuation Funds of Australia, a home-
owning couple in good health needs $640,000 for a comfortable retirement, yet the typical super balances of retirees is much lower than that.
Jason Andriessen, chief client officer at financial advisers, StatePlus, points out it’s not uncommon, particularly in the property hotspots of Sydney and Melbourne, for retirees to be living in a family home worth well in excess of $1 million, but struggling to make ends meet on the age pension.
He says more than 80 per cent of retirees own their own home, but also have insufficient super.
They can also each contribute up to an additional $100,000 each a year in non- concessional contributions if they are still working and under age 75.Under the change, a couple can add a maximum of $600,000 to their super balance in one year by making non-concessional contributions of up to $300,000 per person from the family home, regardless of whether they are working or not.
Once aged 65 and drawing an income stream from the super, regardless of work status, for most people there is no tax on the earnings and no tax on withdrawals. However, from July 1, they will pay earnings tax on the super savings above $1.6 million.
However, the experts warn that the downsizing measure is really only likely to be of help to retirees who are particularly well-off.
That’s because of how the age pension thresholds under the assets test work.
The principal place of residence does not count, but super, savings, shares and almost everything else, including the value of household goods and the car, are included as “counted” assets .
The lower asset threshold for a couple who own their own home is $375,000, meaning they receive the full age pension up to this level of assets.
For assets in excess of that, the age pension is reduced until combined assets reach $821,500, when the age pension cuts out.
Phillip Gillard, a financial planner at Shadforth Financial Group, says part pensioners have to be very careful.
By downsizing, they are taking money out of their principal place of residence, which is not counted under the assets test to where it is counted, in either a bank savings account earning very low interest, or in their super.
That would mean a reduction in the age pension. For each $1000 of assets they shift out of the family home, they would receive $78 a year less in pension payments. The effective return on each dollar that is not counted as an asset for the age pension is 7.8 per cent.
That’s a return that would be very hard to beat without taking a higher level of risk, Gillard says.
Jonathan Philpot, a partner at HLB Mann Judd Wealth Management NSW, says another part of the budget measure underlines how it is really of benefit to the upper-end.
That is because from July 1, no more non-concessional contributions to super will be allowed to those with $1.6 million in their super accounts. But extra non- concessional contributions will be allowed for those who have hit this limit if the contributions are from the sale of the family home.
And even for the well-off, this is not necessarily that much of a help. That’s because retirees are able to have significant earnings outside of super before they have to start paying tax.
Next tier of wealth
Gillard says those who stand to benefit are those on the next tier of wealth, who have rental income or other investment income in their personal names.
The measure is useful for those people who, if they released money from the sale of their home, that money would add to their level of income so that they would have to start paying tax or move into a higher tax bracket, he says.
There are also the costs of downsizing that would have to be weighed up.
Gillard estimates that the costs of stamp duty on the new property and other costs, like the moving costs, add up, very roughly, to something like 7 per cent of the sale price – though that will vary depending on the value of the properties and the extent of the downsizing.
Philpot says there will be other factors in deciding whether or not to downsize apart from financial factors.
“It’s not just financial, it’s emotional and about things like where you want to live – close to the beach or close to the grandchildren, for example,” he says.