5 min read

By the time you retire, you may have collected a considerable amount of home equity and downsizing can be a way to tap into that valuable cash.

Downsize your lifestyle – not your life

When your kids left home you probably had big plans for those unoccupied bedrooms – like the art studio you’ve always wanted, a sewing room or a playroom for the grandkids. 

But it’s possible that those rooms have barely changed and now you may be wondering if you really need all the extra space.

Downsizing may be a way to harness the home equity you have built up. But it’s a big decision and you need to be sure it is the right choice that helps you scale back your life without scaling back your lifestyle.

Let’s look at some factors to consider.

1 Where would you like to move?

When you’re not in the workforce, your choice of location is no longer dictated by proximity to work. You’re free to explore a change of scenery or even relocate overseas.

This opens exciting possibilities, although you may want to remain close to family or friends. This certainly makes a long distance relocation something to think through carefully. If you’re heading off to a new location, investigate whether the area has clubs and organisations to help you make new friends and become part of the community.

2 What sort of property are you looking for?

Along with the location, plans to downsize should cover the type of property that is right for your needs – both now and in the future.

Some of the factors you may want to look at are the ease of maintenance of the property, how many stairs it features and whether doorways are wide enough to accommodate aids such as a walking frame. Single level living is often a must-have for seniors.

3 Does it stack up financially?

On paper at least, downsizing may seem like a great way to free up extra cash. But you will need to pay for a new home and this brings a range of buying and selling costs which can eat into the sale proceeds of your current home. You also need to consider the value of your home versus any outstanding mortgage owing, as this would have a significant impact on your financial position.

There are ongoing costs to consider too. Moving from a house into an apartment can mean a lower maintenance style of living. Be sure to look into strata levies though. The more facilities an apartment complex offers, the higher the levies you are likely to face.

4 Have you considered your emotional needs?

There’s a lot of family history tied up in our homes and you shouldn’t discount the emotional attachment to your place. Think through the decision to move very carefully and discuss it with your family. The last thing you need is to make a decision you’ll regret.

Investing the proceeds of downsizing

Give some thought to how you will use any funds that may remain from the sale of your old place once you have purchased a new home. 

Making after-tax (non-concessional) super contributions

One possible strategy is to use the money to make an after-tax (non-concessional) contribution to your super fund. From 1 July 2017, the cap on after-tax contributions is $100,000 per year and you will only be able to make after-tax contributions if your total super balance is less than $1.6 million.

If you are aged under 65, you may be able to contribute up to $300,000 in a single year as long as you make no additional after tax contributions for the remaining two years. This is called the ‘bring forward’ rule.

If you’re aged 65 or over, you must satisfy a work test to be able to make an after-tax super contribution and you cannot take advantage of the bring-forward rules.

Changes announced in the 2017/18 financial year Australian Federal Budget

In this year’s Federal Budget, the Government announced a proposal to help older Australians who downsize their family home to invest some of the proceeds into superannuation.

If the Government passes legislation to enable this proposal, from 1 July 2018, if you are aged 65 or over you will be able to make after-tax contributions into superannuation of up to $300,000 for an individual or up to $600,000 for a couple from the proceeds of selling your principal residence. The usual contribution rules outlined above will not apply, so it doesn’t matter what your work status is, nor will it matter what your account balance is.

To be eligible for this new measure, you must have owned the principal residence for at least 10 years prior to selling it. This may allow you to unlock the value of your home to boost your retirement income. You should be aware that unlocking these savings may impact your entitlement to Social Security benefits, such as the Age Pension.

Consider what will suit your situations and goals

While investing any proceeds from the sale of your property into your super fund is one potential strategy for you to consider, your financial adviser can discuss other strategies that are tailored towards your own situation and goals.

Need help understanding your financial options? Contact us to arrange to speak to a BT adviser
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This information is current as at 4 July 2017.

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. 

This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Superannuation is a means of saving for retirement, which is, in part, compulsory. The government has placed restrictions on when you can access your investment held in superannuation. The Government has set caps on the amount of money that you can add to superannuation each year on both a concessional and non-concessional tax basis.  There will be tax consequences if you breach these caps.  For more detail, speak with a financial adviser or visit the ATO website.

Any tax considerations outlined above are general statements, based on an interpretation of the current tax law, and do not constitute tax advice.  The tax implications can impact individual situations differently and you should seek specific tax advice from a registered tax agent or registered tax (financial) adviser.

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