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Downsizing in Retirement: Benefits, Rules, and Downsizer Contributions

Published 10/10/2024 | Last Updated 10/10/2024

Written by:
Joel Simmonds
Head of Advice  

Thinking about downsizing as you head into retirement? You’re not alone. Many Australians choose to downsize their homes to make the most of their savings and enjoy a simpler lifestyle. But what does downsizing really mean, and how can it impact your financial situation?

In simple terms, downsizing means moving to a smaller home or a more affordable property. It can free up some cash, reduce your living expenses, and even offer a fresh start in a new location. For many, downsizing for retirement is a smart way to stretch their savings further and enjoy a comfortable lifestyle.

But there’s a lot more to consider, from making a downsizer contribution to understanding the downsizer contribution rules. In this guide, we’ll break down the key things you need to know about downsizing in Australia and how to make it work for you.

Table of Contents

Why Consider Downsizing?

Downsizing offers several benefits that can improve your retirement lifestyle and finances. Here’s why many retirees choose to take this path.

  • Financial Flexibility: Downsizing your home can release funds that you can use to boost your savings or pay off debts. It can be particularly helpful if you’re looking to become mortgage-free.
  • Lower Maintenance: A smaller home means less upkeep, fewer repairs, and lower utility bills, which can make life much easier in retirement.
  • Decluttering and Simplifying: Moving to a smaller home often means decluttering — an opportunity to let go of what you don’t need and focus on what really matters. It’s a key part of downsizing and decluttering.
  • Potential Tax Benefits: There’s also the opportunity to make a downsizer contribution to your super, which can have financial advantages. We’ll explore that in more detail later on.

Downsizer Contribution: What Is It?

A downsizer contribution allows eligible Australians to put up to $300,000 from the sale of their home into their superannuation. This is designed to give retirees a way to boost their super balance, using funds released from downsizing.

Key points about the downsizer super contribution:

  • You need to be over 55 to be eligible (as of the latest rules).
  • The home you sell must have been owned for at least 10 years.
  • You can make a downsizer contribution even if your super balance is above the usual limits.
  • Couples can contribute up to $300,000 each, potentially adding up to $600,000 to their super.

This is a great way to ensure that any extra money from selling your home works towards your long-term financial security. The ATO downsizer contribution rules provide more detailed guidance on how this works.

Eligibility and Age Requirements

Before you make a downsizer contribution, you’ll need to make sure you meet the eligibility criteria:

  • Age Requirement: You must be over 55 years old.
  • Ownership Period: You must have owned the home for at least 10 years before selling it.
  • Use of Funds: The contribution needs to be made within 90 days of receiving the sale proceeds.

To get all the specifics, check out the ATO downsizer contribution fact sheet or speak to a financial advisor who can guide you through the process. Understanding the downsizer contribution age limit is key to making the most of this opportunity.

How to Make a Downsizer Contribution

Making a downsizer contribution is straightforward, but it’s important to follow the right steps:

  1. Sell Your Home: Ensure that your property meets the eligibility requirements.
  2. Fill Out the Forms: You’ll need the ATO downsizer contribution form to declare your intent.
  3. Make the Contribution: Transfer up to $300,000 into your super within 90 days of settlement.
  4. Notify Your Fund: Let your super fund know that the contribution is from downsizing using the correct paperwork.

If you need help with the process, consult a professional to ensure everything goes smoothly. The ATO downsizer contribution rules outline all the steps in detail.

Downsizing Rules and Considerations

Downsizing has specific rules that you need to be aware of:

  • Centrelink Downsizing Rules: The proceeds from selling your home can impact your age pension eligibility, depending on how much you have left after purchasing a new home.
  • Stamp Duty for Pensioners Downsizing: Some states offer concessions or exemptions on stamp duty for pensioners who are downsizing. This is worth exploring to reduce your moving costs.
  • Capital Gains Tax (CGT): Generally, selling your primary residence is exempt from CGT, but it’s a good idea to confirm your situation before selling.

Make sure you understand the downsizer contribution rules and any other downsizing rules that apply in your state to avoid any surprises.

Alternatives to Downsizing

Not sure if downsizing is the right move for you? Here are some alternatives to consider:

  • Renting Out Your Home: If you want to keep your property but still need some extra income, renting it out could be an option.
  • Downsizer Contribution with an Investment Property: It’s possible to make a downsizer contribution even if you downsize to an investment property.
  • Retirement Villages: Some people prefer moving into a retirement village for the community and support.

It’s important to weigh up all the options before making a decision. The advantages of downsizing can be significant, but it’s not the only way to achieve a comfortable retirement.

How To: Make Downsizing Easy

To make downsizing as smooth as possible, follow these tips:

  • Plan Ahead: The best age to downsize is when you’re ready both emotionally and financially. Make sure you prioritise your happiness – it’s what counts the most! 
  • Research Locations: Look for the best places to downsize in retirement where you can enjoy the lifestyle you want. Ideally, you’ll be close to family, too. 
  • Use a Checklist: A downsizing checklist for seniors can keep you organised.
  • Budget Wisely: Set aside funds for moving costs, renovations, and unexpected expenses.

Downsizing and Superannuation Contributions

The Downsizer Contribution Scheme is a unique opportunity for Australians aged 55 and over, allowing them to make a one-time contribution of up to $300,000 per individual ($600,000 per couple) into their superannuation using the proceeds from selling their home. This contribution is not taxed when entering the super fund, making it a highly tax-effective option.

Without this scheme, any surplus from selling a home could potentially be subject to different tax treatments:

  • Capital Gains Tax (CGT): If the property sold is not your primary residence (for example, an investment property), you might need to pay CGT. In Australia, the CGT rate is effectively half of your marginal tax rate for assets held longer than 12 months due to the 50% discount on capital gains. Depending on your income, this could range from 19% to 45%.
  • Deemed Income: If the proceeds from the sale are kept outside of superannuation, such as in a bank account or investment portfolio, any returns (interest or investment income) would be subject to your marginal tax rate. This means that investment returns could be taxed up to 45% if you are in the highest income bracket.
  • Earnings on Super Contributions: If you contribute to super outside the downsizer scheme, concessional contributions (like salary sacrifice) are typically taxed at 15% within your fund. However, there are annual limits on concessional contributions (currently $27,500), which means exceeding these caps could incur higher tax penalties.

By using the Downsizer Contribution Scheme, you can avoid these higher tax rates, making it easier to grow your superannuation balance and retain more of your funds for retirement.

Always consult with a financial advisor to understand how this could apply to your situation. 

Common Questions About Downsizing

What is the Downsizer Contribution Cap? 

The cap is set at $300,000 per person, allowing a couple to contribute up to $600,000 from the sale of their home into superannuation.

Do I Pay Tax If I Downsize My House? 

Usually, selling your main residence is exempt from capital gains tax. However, it’s always best to consult with a financial advisor if you’re not sure about your situation. 

What Are the Benefits of Downsizing for Seniors? 

For many seniors, downsizing offers a way to reduce living costs, enjoy a simpler lifestyle, and increase superannuation savings through the downsizer contribution.

So, is Downsizing the Right Choice for You?

Downsizing can be a great way to enjoy a more flexible lifestyle in retirement while boosting your superannuation savings. But it’s not a one-size-fits-all solution. Whether you’re looking to make a downsizer contribution or simply want to reduce the burden of home maintenance, make sure you understand the rules and consider your options.

Talk to a financial advisor to ensure that downsizing for retirement aligns with your long-term goals and to make the most of the opportunities available to you.

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December 5, 2024

This is a publication of Direct Wealth Pty Ltd, a wholly owned subsidiary of Direct Wealth Group Pty Ltd.

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