Over-55s who sell the family home can top up their superannuation by $300,000 for individuals and $600,000 for couples.
Almost 60,000 downsizers have sold their homes and pumped $14.5 billion into superannuation with the proceeds over the past five years, according to analysis by the Australian Taxation Office provided exclusively to AFR Weekend.
Empty-nesters are cashing in on a generous federal government initiative that allows them to top up their super by $300,000 for individuals and $600,000 for couples.
John and Sandra Parker swapped their four-bedroom home for a three-bedroom apartment. Elke Meitzel
“The downsizer incentive is one of superannuation’s best-kept secrets,” says former Commonwealth Bank economist Michael Blythe, who now works for Downsizer.com, which helps people who are considering buying a smaller property.
“If you look at the average return super funds have generated over the past decade, it could boost the income of a downsizer by $20,000 a year.”
John and Sandra Parker swapped their four-bedroom home in Bayside, Melbourne, for a three-bedroom apartment.
“I wanted to use my energy at the golf course, rather than mowing lawns,” says John, a former senior executive with Ford Australia.
They also wanted to remain in the local community – HILDA data shows when Australians move, 36 per cent stay in the same postcode and another 24 per cent move within a nine-kilometre radius – close to familiar shops and amenities.
“We have found a place that meets all our requirements,” John says.
But it came at a cost. The couple paid more than $4 million for the new apartment, plus moving expenses, new furniture and stamp duty of $200,000.
In all, it cost more than the proceeds of the sale of the family home, but the couple could use the downsizer initiative to top up their super using other savings.
This is because it is the sale of the family home that triggers eligibility to make the top-up. The contribution does not need to be from the sale proceeds of the property.
“It’s a very good deal,” John says.
Average downsizer contributions to superannuation reached a record high of just over $280,000 after the government dropped the age of eligibility to 55 from January 1 this year, according to accounting software provider Class, which has 200,000 self-managed superannuation fund clients. The previous eligibility age was 60, and before that it was 65.
Downsizer contributions aren’t limited by regular concessional and non-concessional contribution caps, which means people can direct up to $300,000 beyond any funds already in their super.
However, the money will be counted toward a person’s total super balance amount and is subject to the transfer balance cap, so it is important to seek financial advice.
Another thing to remember is that the property sold must have been the primary place of residence at some point and have been owned by the claimant for at least 10 years.
Most downsizer contributions (about 60 per cent) occurred in the 70-plus age group, and more women topped up their super with the sale of the family home than men, Class says in a report released last month.
“A booming property market has led to downsizing as Baby Boomers have sought to cash in on property prices to boost their retirement,” the report says, adding that rising living costs could force more people to downsize in coming years.
“Some retirees that haven’t yet downsized to a smaller property may need to consider doing so to free up equity to help them with the rising cost of living and support their lifestyle.”
More than one in 10 households are considering downsizing, according to analysis by consultancy Digital Finance Analytics, and 90 per cent of people aged between 65 and 74 live in properties with only one or two residents despite having three or more bedrooms.
Property developer Tim Lowe, managing director of Lowe Living, a Melbourne Bayside developer, says demand is strong for low-maintenance, customised three-bedroom apartments ranging in price from $1.5 million to $2.5 million.
But specialists warn that high moving costs and a shortage of suitable alternative properties are creating downsizer disasters, causing many to pay too much, or remain in their expensive outsized homes.
Kelly Kennedy, financial adviser with consultancy BDO, says the simple message is to get it right the first time, so you do not have to downsize twice.
“Doing it right will not only free up housing for young people, but also frees up wealth for downsizers to fund a comfortable retirement,” she says.
Get it right the first time, BDO’s Kelly Kennedy says about downsizing.  Michael Quelch
Kennedy warns some downsizers make the mistake of paying too much for their next home, which undermines their hopes of supplementing their retirement income with the proceeds from the sale.
She says she often sees clients move from, say, a $2.6 million five-bedroom house to a $2.2 million townhouse.
“After factoring in stamp duty and moving costs, the downsizers are left with $300,000 in change, and that is not going to cut it if they are banking on this to fund their retirement,” she says.
The BDO tables below break down the $178,600 costs involved in selling and the buying costs of downsizing from a $3 million to a $1.5 million property, including stamp duty in each state and territory.
Selling costs include the estate agent’s fees of $75,000, and $1000 for removalists; buying expenses include $72,000 for stamp duty, mortgage and transfer fees.
Stamp duty varies between states and territories. Victoria’s is the highest at $82,500, more than 30 per cent higher than Tasmania’s $62,685.
“One reason the housing stock is not being utilised efficiently is the decline in turnover,” says Maree Kilroy, a senior economist with Oxford Economics Australia.
Many downsizers are being forced into taking out expensive bridging finance, warns Phoebe Blamey, a mortgage broker with Clover Financial Solutions.  
“Upfront costs such as stamp duty acts as a deterrent to transact. This is most obvious in Sydney, with the rate of property turnover halving over the past 25 years. From 8 per cent in 2000, less than 4 per cent of properties in Sydney are transacted per year.”
Phoebe Blamey, a director of mortgage broker Clover Financial Solutions, says a shortage of properties in popular postcodes is making it harder to find a new place in the right price range.
“This is forcing many buyers to pay more than they expected and often involves expensive bridging finance,” Blamey says.
Michael and Sue Ryan decided to sell their five-bedroom home and downsize into an off-the-plan luxury complex called Akoya in Greenwich, on Sydney’s lower north shore.
“We bought an apartment because of the lifestyle the complex offers and the opportunity to top up our super,” says Michael, a retired IT consultant. The couple will move into the new apartment when it is completed around December. The complex includes a theatre, pool and concierge services.
Michael says sale proceeds from his house will not cover the cost of moving and buying the apartment. But he will top up his super with other savings.
According to the ATO, between July 2018 and April this year, about 58,000 individuals made downsizer contributions to their superannuation totalling about $14.5 billion.
Alternatives to downsizing range from renting out space through to a reverse mortgage, which is a way of using the equity in a property to generate income.
Converting a property to dual occupancy enables an owner to live in one half and rent, or sell, the other.
“Before proceeding with any of these options, check the tax impact and whether it will affect your government benefits,” a spokesman for the Australian Securities and Investments Commission said.
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