As Australians transition into different phases of life, they often find themselves with a desire to simplify, declutter, and release equity from their homes. The Australian government’s Downsizer Contribution Scheme offers a unique avenue for seniors to achieve just that while boosting their retirement savings. Today, we explore the benefits of the Downsizer Contribution Scheme, complete with a case study that illuminates its real-world impact.
The Downsizer Contribution Scheme: A Brief Overview
Introduced in July 2018, the Downsizer Contribution Scheme currently allows individuals aged 55 and older to make contributions to their superannuation from the proceeds of selling their home. The Downsizer Contribution Scheme does not require individuals to meet the usual work test nor does the total super balance cap limits apply. However, to be eligible to make downsizer contributions, a number of conditions need to be met, including:
Contributions may only be made by an individual aged 55 or over;
- The contributions arise from the sale of a residence that has, at some or all of the time of its ownership, qualified as the individual’s main residence for Capital Gains Tax purposes;
- The residence has been owned by the individual and/or their spouse for at least 10 years;
- The contribution of up to $300,000 per spouse needs to be made from the sale proceeds of the residence within 90 days of change of ownership (settlement);
- The contract for sale of the property was entered on or after 1 July 2018;
- An election to make a downsizer contribution is made in the approved form; and
- The individual has not previously made a downsizer contribution.
Case Study: Downsizer Contribution Boosts Retirement Savings
Meet John and Mary, a retired couple in their late 60s living in Melbourne, Australia. They have been homeowners for over 20 years and are considering downsizing their family home to a smaller, more manageable property.
Let’s explore how the Downsizer Contribution Scheme can help them make the most of their retirement savings while enjoying a more comfortable lifestyle.
Background
John and Mary have recently retired and are looking forward to simplifying their lives. They own a spacious family home with four bedrooms and a large garden. While they have cherished memories in this home, they now find it challenging to maintain such a large property. With memories attached to their spacious property, John and Mary found herself torn between the emotional connection and the opportunity to release equity for their retirement.
Their family home is valued at $1.3 million, and they have lived there for more than 25 years. They are both currently receiving the full Age Pension of 1,682.80 per fortnight combined ($43,752 p.a combined). Their other assets are $50,000 in a CBA bank account earning 4%, a Toyota Camry valued at $30,000 and home contents of $10,000 (fire sale Value). There total combined income with interest earned is $45,752 per annum.
Decision to Downsize
After careful consideration, John and Mary decide to sell their family home for $1.3 million and purchase a smaller, more modern townhouse valued at $700,000. They believe downsizing will not only make their day-to-day life easier but also release equity that can be used to bolster their retirement savings.
From here after receiving personal financial advice from a Financial Adviser they contribute $300,000 each to superannuation using the Downsizer Contribution Scheme. The contribution does not count towards their regular concessional or non-concessional contribution caps. This allows them to boost their retirement savings without worrying about exceeding contribution limits.
Financial Benefits/Outcomes
By downsizing and each making the downsizer contribution, John and Mary can enjoy several financial benefits: They reduce their home maintenance and utility costs, contributing to a more comfortable retirement lifestyle. The $600,000 downsizer contribution will be invested within their superannuation funds where they will commence an Account Based Pension each where they will both draw a tax-free minimum pension payment of $15,000 p.a (Combined $30,000 p.a). As a result of the additional funds, they now have in superannuation their Age Pension will now reduce to $967.30 per fortnight combined ($25,149.80 p.a combined). This now results in their total combined income of $57,150 which includes their age pension entitlements, income from their account-based pensions and the interest on their bank account. This has resulted in an increase of approx. $11,400 pa towards their retirement.
Retirement Peace of Mind
John and Mary’s decision to downsize and make downsizer contributions provides them with financial security during their retirement years. The extra funds in their superannuation accounts give them peace of mind, knowing they have a cushion to cover unexpected expenses and enjoy their retirement to the fullest.
Conclusion
John and Mary’s case showcases how the Downsizer Contribution Scheme empowers retirees to make strategic financial decisions that enhance their retirement years. As Australia’s population ages, the Downsizer Contribution Scheme emerges as a strategic tool for seniors seeking to transition to a more manageable lifestyle while ensuring they have the financial resources to enjoy their retirement to the fullest. By harnessing the power of the scheme, individuals like John and Mary are better able to pave the way for a comfortable and rewarding retirement journey.
All calculations outlined in this article are based on the Age pension rates and thresholds and superannuation laws as at 1 July 2024.
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