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Five things to consider before you downsize

Thinking about switching the family home for a smaller one now that you’ve retired? Here’s some things you should consider first.

Downsizing your home is a great chance to finally get rid of the clutter that has built up over the years. It can also be an opportunity to make a total lifestyle change by moving somewhere more tranquil – or more exciting.

What’s more, by choosing to downsize, retirees will soon be able to use the proceeds of the sale of their home to top up their super savings, according to recent government legislation.

From 1 July 2018, people aged 65 and older will be able to make a ‘downsizer contribution’ to their superannuation of up to $300,000 from the proceeds of selling their main residence.

But before you to put your property up for sale, here’s five things you should think carefully about first.

1. The costs

Before you decide to downsize, you’ll need to calculate the costs involved in selling your house, including real estate and legal fees, and capital gains tax (although a partial or full capital gains tax exemption may apply). There may be additional expenses at your new place as well, like stamp duty, legal fees, and strata fees if you move to an apartment or townhouse.

Then there are the costs of moving, which will be even higher if you’re relocating to another part of the country or overseas. That’s why it’s worth doing some research around removal and storage services to find the most affordable option.

From 1 July 2018, people aged 65 and older will be able to make a ‘downsizer contribution’ to their superannuation of up to $300,000 from the proceeds of selling their main residence.

2. The market

It’s important to be realistic about how much your home is likely to sell for. For starters, you can get a professional valuation from a real estate agent to find out what your property is worth in today’s market.

If you’re not in a hurry to downsize, it may be worth researching which times of the year are the best to sell. Then, you can wait until the market moves in your favour.

Ideally, you’ll want to sell while property prices are high – but remember, this could also mean having to pay more for your new place. One solution could be to buy in an up-and-coming neighbourhood that still has affordable housing, but where property values are likely to increase over the next few years.

3. The location

So where should you move to? Property prices are likely to be your main consideration when choosing a location, but you should also think about the kind of lifestyle you want.

For instance, you might decide on somewhere with a slower pace of life so you can enjoy a relaxing retirement. Alternatively, you could opt for an apartment closer to the hustle and bustle of the city – or perhaps even try living in a new country.

And, if you’re moving far away from friends and family, it helps if there’s a local community of other retirees who you can get to know.

It’s also worth thinking ahead to how your physical needs may change during your retirement years. You’ll want to make sure there are quality healthcare services within easy reach.

4. The space

If you’re downsizing because your home now seems unnecessarily large, it might still be a shock to move into a small apartment or townhouse – especially if you’re used to having two storeys and a big backyard.

That’s why it’s important to plan ahead so you know you’ll be comfortable with the space you’re moving to. First up, write a list of the large household items you plan to take with you and the ones you can live without. This will help you work out how much space you really need.

5. The reward

For many downsizers, moving to a smaller property can result in a tidy profit from the sale of the family home.

But while it may be tempting to blow the lot on that luxury round-the-world cruise you’ve always dreamed of, it’s a good idea to invest at least part of the sale proceeds towards your future.

Downsizing to top up your super

To boost your retirement savings, you could make use of the government’s new ‘downsizer contribution’ measure, effective from 1 July 2018, allowing you to put up to $300,000 from the sale of your home into your super, as long as you’re aged 65 or over and have owned your home for 10 years or more.

Both members of a couple may take advantage of it, which means up to $600,000 of contributions may be made by a couple upon downsizing. To be eligible, the exchange of contracts on the home being sold must occur on or after 1 July 2018.

Downsizer contributions will not be subject to existing age and work tests that apply to voluntary contributions for those aged 65 or older. They can be made in addition to any other contributions that individuals are eligible to make and are not subject to the non-concessional (after-tax) contributions cap. The $1.6 million total superannuation balance requirement when making non-concessional contributions will also not apply.

However, once made they count towards your total superannuation balance which can impact your eligibility for other superannuation rules (eg, if your total superannuation balance just prior to a financial year is $1.6 million or more, your non-concessional contributions cap reduces to Nil). Downsizer contributions used to commence retirement phase income streams (eg, allocated pensions) also count towards your $1.6 million transfer balance cap.

It is important to note that downsizer contributions must generally be made within 90 days of the date of receiving the sale proceeds.

You can only make downsizing contributions for the sale of one home and you can't access it again for the sale of a second home. If you sell your home, are eligible and choose to make a downsizer contribution, there is no requirement for you to purchase another home.

Also, downsizer contributions are not tax deductible and will be taken into account for determining eligibility for the age pension. For more information, visit the Australian Taxation Office website.

Get good advice

And remember, if you do decide to downsize, a financial adviser can help you review your options so you can make the most of the sale proceeds and enjoy a comfortable retirement lifestyle.

Disclaimer
Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the issuer of super, pension and investment products. This document may include general advice but does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. A PDS for Colonial First State’s products are available at colonialfirststate.com.au or by calling us on 13 13 36.