For many people, super is one of the best ways to grow your wealth, as it provides significant tax concessions to help you save for retirement. Downsizer contributions are a valuable way to boost your super as you approach retirement.

What is super?

Superannuation is a specialised type of investment structure designed to help you accumulate a significant level of savings for your retirement. To encourage you to save for retirement, the rules provide various tax concessions for super investments. For most people, these tax concessions make saving through super more tax-effective than saving outside it, which means their savings may grow faster. In return for the tax concessions, the rules restrict when and how you can access your super – generally you need to wait until you retire after reaching what is known as your ‘preservation age’. Your preservation age will be between 55 and 60, depending on your date of birth. You can find out what your preservation age is by visiting ato.gov.au or speaking to your financial adviser.

Why is super important?

Australians now have a higher life expectancy than ever before. Current figures show that on reaching the age of 60, the average man will live for another 28 years and the average woman another 30 years. It is unlikely that the government Age Pension alone will give you the financial freedom you want for the 25 or more years you are likely to spend in retirement. The Age Pension is designed to provide a basic income, but many people want a lot more from their retirement years including overseas travel, dining out, spending more time with their families and enjoying a more relaxed lifestyle.

How to grow your super?

There are many strategies you can adopt to increase your super balance including concessional and non-concessional contributions, voluntary employer contributions, personal and spouse contributions. Each has its own set of criteria. In this article, we are focusing on downsizer contributions.

Downsizer contributions

A downsizer contribution is a rule which allows individuals to make a lump sum contribution to super from the sale of their home.

From 1 January 2023, if you are aged 55 or over (no upper age limit) and sell your principal home, you may be able to make a super contribution of an amount equal to all or part of the capital proceeds received from the sale, up to $300,000.

These contributions are known as downsizer contributions and are not subject to normal contribution eligibility criteria such as having to meet a work test and don’t count towards other contributions caps. However, it will count towards your total super balance and transfer balance cap, currently set at $1.7 million. This cap applies when you move your super savings into retirement phase.

If you are thinking of selling your home, this measure allows you to contribute up to $300,000 ($600,000 combined for a couple) into the concessionally taxed superannuation environment. The contribution will be tax free when received by your fund, although it will be assessable under the social security assets test and generally deemed under the social security income test. To be eligible to make a downsizer contribution, your principal home must have been owned by you and / or your spouse for at least 10 years, and you must have not made a downsizer contribution from the sale of another home in the past. Please note, there are a number of additional eligibility requirements that will also need to be met. For further information about downsizer contributions, speak with your financial advisor.

Client scenario

Jack is aged 62. His largest asset is the family home which he has owned for over ten years, valued at $2 million. Jack’s adult children have moved out of home and the house is too large to maintain for a single person. Jack has approximately $1 million in superannuation. Jack can sell his home, downsize to a home more suited to meeting his needs and lifestyle and contribute an additional $300,000 from proceeds of the sale of his home into his superannuation fund. Assuming a 5% return, this is an additional $15,000 per annum to assist with meeting the cost of living expenses in retirement.

Things to note

• Super is one of the largest investments you will ever make in your lifetime.
• The tax concessions can make it a great way to save for your retirement.
• A downsizer contribution doesn’t count towards any of the contribution caps and will not affect your total superannuation balance until it is re-calculated at the end of the financial year. However, downsizer contributions will count towards your transfer balance cap. This cap applies when you move your super savings into retirement phase and will be considered for determining eligibility for the age pension.
• Super regulations are changing constantly so it is important to get professional financial advice to plan for a better and more secure lifestyle in retirement.

Finally, the name ‘downsizer’ is a bit of a misnomer. To access this measure you do not have to buy another home once you have sold your existing home, and you are not required to buy a smaller home – you could buy a larger and more expensive one.

Contact our financial planning team for a complimentary initial conversation about the best approach for your personal situation.

The information on this web page is not advice and is intended to provide general information only. It does not take into account your individual needs, objectives or personal circumstances.