Downsizer contributions updated – good, bad and smart

Historically, once you passed the age of 65 you were unable to contribute to superannuation unless you continued working.

But considering number of people approaching retirement and wanting to put their financial affairs in order for the most beneficial and suitable outcome for retirement, from 1st July 2018 we had introduction of a new type of superannuation contribution named the “downsizer contribution”.

The idea was to allow people even above the age of 65 to contribute more money to a super fund if they decided to downsize their family home.

And that worked, lots of pre-retirees and current retirees received a good professional advice to understand their financial choices, sold their expensive homes, downsized, and utilised the remaining proceeds of the sale of the original family home to add money to super, up to the allowable limits hence, to improve the super balance of their fund in order to improve their lifestyle in retirement.

If you don’t know much about Downsizer Contributions, read the full explanation of how this strategy works and who can benefit: Downsizer Contribution to super for better retirement and Downsizer Contribution to super – Rules.

This strategy worked so well, and that many retirees started to take advantage of this type of extra savings to super, that the government realised the age restriction was just simply too harsh.

Therefore, from 1st July 2022 the Downsizer contribution eligibility age was reduced from 65 down to the age of 60.

But now, from 1st January 2023 we have another change to this strategy, where more and more people can benefit from this little gem to improve their superannuation balance, improve their retirement savings thus improving the retirement income, standard of living and subsequently enjoy life a little bit more.

So today we will be talking about another update to the Downsizer Contribution that commenced on 1st January 2023, I will explain who can benefit, but also what to watch out for, so you can make an informed decision if this type of the contribution is really to your benefit or not.

From 1st January 2023 the age eligibility requirements to make a Downsizer contribution was lowered to the age of 55.

Obviously, we can agree that this is a great contribution opportunity for many and an easy way to add extra funds for retirement, but this could be an extra opportunity to improve other benefits as well, however you need to be aware of possible traps and shortcomings as well.

So first, let’s review who is eligible now under those new rules from 1st January 2023.

As mentioned before the eligible age was reduced down to 55. This is the minimum age requirement at the time of the contribution is being made and please remember that the contribution needs to be made within 90 days from the settlement date.

To make sure you understand the importance of this, let’s meet Maggie and Stewart. They sold their family home on 2nd of January 2023. Their settlement date is on 1st February 2023. Therefore, they have 90 days from 1st February to make Downsizer Contributions providing they meet all other contribution requirements.

Maggie’s date of birth is 20/03/1968

Stewart’s date of birth is 3/05/1968

Can Maggie and Stewart make a Downsizer Contribution to super? What do you think? What you believe the answer is?

They are not 55 just yet at the time of the sale of their property, and they are not 55 at the time of the property settlement date, but this is not the requirement. They do not have to be of this minimum age of 55 at the time of the sale nor the settlement.

The age requirement is at the time of making the contribution. Therefore, Maggie will be eligible to make up to $300,000 Downsizer Contribution to super, as her 55th birthday is before the 90 days allowable contribution period, however Stewart is not eligible, as his birthday is 2 days after the 90 days period is completed. What a shame to miss out on such opportunity.

My recommendation would be to go back to the buyer of the original family home and renegotiate the settlement date for a new day.

Just couple of days extra provide enough time for Stewart to become eligible for the Downsizer Contribution as well.

Please keep in mind that there are other Downsizer Contribution requirements that you need to meet over and above just the age rules, however today’s article is an update to the changes introduced on 1st January 2023 only.

For all further details, please read those previously mentioned articles, or just simply contact me directly for the full advice.

Let’s look at few other examples:

1.Steven and Marcia, who are both 56 years of age, so thy both already meet the minimum age requirements, however they sold their family home on 15th November 2022 with settlement on 15th December 2022. Are they eligible to make a Downsizer Contribution, considering that they sold their home before the introduction of the change from 1st January 2023?

2.Tom and Mary, also both age of 56, so again they both the minimum age requirements for the Downsizer contribution. They sold their family home on 2nd December 2022 with the settlement on 2nd January 2023.  They sold their family home before the introduction of the contribution age change; however, the settlement is already in 2023.

Are they eligible for the Downsizer Contribution?  What do you think about this scenario?

Who do you think is eligible to make the downsizer contribution and who is not?

Well, they all are, the date of the sale of the property is irrelevant for the contribution rules, we are more concern about the date of the property settlement. As long as the 90-day contribution timing is met and this happens after 1st January 2023, the Downsizer contribution can be performed.

So, assuming you meet all those contribution requirements, should you contribute to super the surplus of your property settlement? Is super the best investment scenario? Is there anything you should be aware of and prepare for?

Absolutely, this is where you have to make your judgement call, but this is also where your future plans and goals are essential to be clear and precise, otherwise you might find yourself in a little bit of a pickle.

Just because you can contribute to super, does not mean you have to do this, and that such strategy is to your best interest. Please don’t forget that once funds have been contributed, that money is stuck in super until you meet conditions of release, which in most cases is age of 65 or retirement.

If you are 64 and you are making such a contribution, the worst case scenario is to wait one year before you have access to those funds again, however, if you are 55 that is a different conversation. We are talking about 10 years money being stuck in super before you can access it.

So, you better think twice before you contribute such a big sum of money to be closed off for such a long period of time.

In saying that, no access to money is often a blessing for many, as there is no temptation to spend it, so your money can enjoy some hopefully solid rate of return and a magic of compound interest over that long 10-year period.

But if you have other plans, or other financial commitments, plan in advance what is beneficial and what is not, so you are not trapped in the situation of having money but with no access to it in case of emergency or other investment opportunities.

As you can see, every information counts, planning in advance is essential. Please do not act impulsively with your money.

Procrastination is terrible but taking the time to understand the options available to you, thinking about what you wish to do, years you want to work, your earning capabilities, is essential.

To make sure you do not make any costly mistakes, please just get the full financial planning advice. Our lives are complicated, financial system in Australia is complicated, so it only makes sense to take advantage of the professional services that can assist you get clarity around your money, your life plans and goals to achieve the best outcome for your best future.

By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement