From July 1, retired people aged 65 or over will be able to downsize their homes and invest up to $300,000 into their superannuation funds without affecting contribution and balance caps.
It sounds attractive but whether it’s a good idea or not depends on who you are. Research by actuaries Milliman shows that the people with most to gain are those with low super balances and a valuable home.
That is because of the way the age pension assets test interacts with superannuation income.
A couple with a family home can have a maximum of $380,500 invested and still get a full pension. The pension tapers away at $3 for every $1000 above that limit and cuts out totally when non-home assets top $837,000.
“If you have a small super balance, a family home and few other assets it is attractive to downsize,” said Jeff Gebler, risk expert with Milliman.
That’s because you can build your super balance without losing too much of the pension.
This table demonstrates how it works. It assumes a home-owning couple who downsize and invest $300,000 into super in a balanced fund paying average returns.
So if you are a couple with only $100,000 in your super then downsizing and investing $300,000 into your fund will see you earn $16,722 in extra income each year, pushing your total income to $58,232. And remember, because to do this you must be 65 or over, you will pay no income tax on any of that money.
If you are wealthy enough to downsize and invest $600,000 in super, the maximum allowed for a couple under the scheme, things look even better.
But for the average couple who are far more likely to gain $300,000 from downsizing, the results are stark. The more you have in super the less you gain by downsizing with the benefit sinking to only $4037 for those starting off with $400,000 in super.
There is another group who could benefit and that’s those who already have too much invested in non-home assets to be eligible for any pension. They could get some capital out of their home and invest up to $600,000 in super as a couple even if their funds have more than the $1.6 million transfer balance limit already.
Jonathan Philpot, from accountants HBL Mann Judd, told The New Daily that retirees need to be very sure of their situation before making a downsizing move.
“You’ve got to be very careful because any money you take out of your home and invest in super will be subject to the assets test,” he said.
“The taper rate (of pension income once maximum assets limits are triggered) works out at $78 per $1000 per year. That means you need to earn a return on investments of over 7.8 per cent to justify it.”
Robert Curley, Association of Independent Retirees director, said the effects of downsizing vary dramatically depending on your financial situation.
“If you’re a part pensioner it could destroy you. A couple with $600,000 in super who downsize and invest $500,000 extra would be worse off as they would lose the part pension,” Mr Curley said.
Ross Clare, a researcher with the Association of Superannuation Funds of Australia, said his group welcomed the reform.
“For some people it could be useful,” he said.
A recent survey by National Seniors found that the legislation would encourage 17 per cent of ‘stayers’ (who did not intend to move) to consider downsizing, although 24 per cent would consider downsizing if the sale proceeds were exempt from the age pension assets test.