A few years ago, the Social Services Minister learnt from the Productivity Commission, that older Australians were not averse to the idea of moving house. Seeing an opportunity to improve housing availability for families and maximise retirement income for older Australians at the same time, he sketched out a plan. He was able to formalise that plan later as part of the July 2017 annual budget, in his then role as the Federal Treasurer. Now, he’s the Prime Minister and Scott Morrison has front row seats to see the roll out of the Downsizing contributions into superannuation incentive, that became available on 1st July this year.
The incentive allows homeowners over 65 the opportunity to maximise their superannuation, by putting up to $300,000 each from the sale of their home into their super fund (or $600,000 per couple). It also encourages those clinging onto large family homes to downsize, further reducing their costs and freeing up larger homes for growing families. There is a tax advantage too, with a potential $600,000 being allocated as an investment into superannuation, rather than personal income (and therefore taxable). The advantages are obvious, however that does not mean the incentive is necessarily for everyone.
Nothing good comes without fine print, but nevertheless, the incentive does offer a boost for many anxious retirees, who find themselves with less income than anticipated, as they live longer than they had financially planned for. It really depends on the circumstances you had previously planned for your retirement and whether the incentive could enhance them, or derail them. Firstly, you have to have lived in your current home for ten years and you cannot have entered into a contract of sale before 1st July 2018. You must also make your contribution within 90 days of settlement, once your property has sold and you can also only participate in the incentive once. Most importantly however, you have to want to sell your current home! There’s also the unpleasant reality that those who stay in their homes aren’t eligible for anything. It’s a strange opportunity to consider – go through the upheaval of selling your house and get some extra money to live on, which is yours anyway, or stay and get nothing extra from the Government, even if you’re a self funded retiree.
The issue of financial security is an important one as the incentive encourages people to sell their homes, and invest ‘surplus’ cash that remains after they have worked out what their next home will be – ultimately their downsizing choice - and bought it. This notion is fine if you are moving into one of your investment properties, or into a retirement village or lifestyle estate, however for those with no back up plan it can be risky. The lure of the cash may cause overly concerned empty nesters to scrimp on the purchase of their next home for the sake of the perceived windfall later. It’s the kind of decision that might have been ok when you were younger but is perhaps, at this stage in your life, far from ideal because downsizing would require you to move too far from your family and friends. There has been some argument that rather than maximising the quality of life of older Australians, the incentive prioritises the needs of the next generation and their futures. There is also the possibility that recipients’ boosted super will mean they’ll miss out on qualifying for the pension, or for a health care card.
Given the amount of forward planning required, those who look most likely to benefit the most from the incentive could be not-yet-retired Baby Boomers and self-funded retirees who have failed government benefits income and assets tests. For the former, there is time to plan ahead, change super funds, make decisions about post retirement living and so on. They may well be still living in the family home and just starting to have more detailed conversations about what their retirement plans are. Self-funded retirees, however, may look at it as another potential source of liquid capital, which further diversifies their portfolio and improves their lifestyle during retirement.
The main consideration is what downsizing will look like in a practical sense, for those who take up the incentive. In the majority of cases, it will mean moving from a house to a smaller strata apartment or townhouse due to affordability. For those who currently enjoy plenty of space and privacy, it might be a challenge to find a reasonably priced property that meets your needs. Perhaps one of the largest oversights of the incentive is the psychological and emotional impact that displacement can have on a person, especially elderly people whose homes contain a lifetime of memories. On the flip side though, some retirees look forward to downsizing and the new freedom and opportunities that flow from lock-it-and-leave-it living. There is a big difference though between downsizing from a larger home to a smaller one, for the sake of scaling back and freeing up capital, and downsizing that actually removes some of the essential components of your lifestyle. Apartment living has its benefits, but it also can be restrictive for those who are not yet ready to make their life smaller or leave the familiarity of the home that they love.
As always, it’s best to talk to your family and friends before getting some professional advice from your local real estate agent about what your home would be likely to sell for and what sorts of properties you could buy for hundreds of thousands of dollars less. Then after that it’s probably also appropriate to go and see a financial advisor. Together you can explore your landscape of opportunities reinvesting in superannuation and providing yourself with a reasonable home and lifestyle for the next stage of your life.