WA Super News
Boosting your retirement nest egg
The Federal Government seems always to be tinkering with some element of super. Sometimes it’s to make the tax concessions fairer and more equitable, sometimes to save money and other times to help people better prepare for retirement by being more flexible in how we save and build our ‘nest egg’. Changes starting from 1 July fall firmly into the last category.
So what’s changed and how can you take advantage of them.
Downsizing and super contributions: what you need to know
From 1 July 2018, older Australians can take advantage of a downsizing contribution incentive introduced by the Government, and make a contribution of up to $300,000 into super from the proceeds of selling their home. This contribution is in addition to existing contribution caps, so it provides an opportunity for downsizers to save more in the home-stretch towards retirement.
Downsizers can boost their super
Many larger homes are occupied by older singles or couples, and the Government introduced this measure to encourage these people to downsize into smaller homes that better suit their needs.
This also has a knock-on effect of releasing more housing stock for younger, growing families. Downsizers can deposit up to $300,000 each (with a total contribution of up to $600,000 for couples) into their super.
Although there’s no requirement to actually downsize or purchase another home, there are a few strings attached to this opportunity:
- you must be 65 or over
- your home must be located in Australia
- you (or your spouse) must have owned your home for 10 years or more
- you must make your downsizing contribution within 90 days of receiving the sale proceeds.
- Your home either fully or partially qualifies for the main residence capital gains tax exemption
- it applies to your home only - not holiday homes, houseboats, caravans or mobile homes.
Timeframe and deadlines
The downsizer incentive applies to contracts for sale which are exchanged on or after 1 July 2018. Once your house settles, you have 90 days to make your downsizer contribution and you must notify your super fund in the approved form either before or at the time of making your downsizer contribution.
Benefits of the scheme
- You can release equity tied up in your home. Many older Australians find themselves asset-rich and cash-poor, so the most obvious advantage is that you are releasing equity which is tied up in the family home, giving you more money to cover your living expenses and enjoy a better lifestyle in retirement.
- You don’t need to meet the ‘work test’ so you can make a downsizer contribution regardless of whether or not you are working.
- Additionally, the upper age limit of 75 years which normally applies for voluntary contributions is not applicable, so anyone 65 and over can make a downsizer contribution.
- If you put your contribution into a WA Super Allocated Pension product, all investment earnings you make are tax-free. Plus you have easy access to your money.
We recommend that you get advice from one of our financial adviser to find out whether making a downsizer contribution would work for you. Contact us on 08 9480 3500 to make an appointment with a Western Financial financial adviser.
Things to think about when downsizing
Exempt from the $1.6m total super cap
Downsizer contributions are exempt from the $1.6 million total super balance restriction which normally applies. What this means is that, even if your account balance is over $1.6 million, you can still make a downsizer contribution.
The $1.6 million transfer balance cap on money that you can move into a pension still applies. If you have already transferred $1.6 million into a pension, any downsizing contribution will need to remain in an accumulation account (which is subject to 15% tax on investment earnings).
Social security implications
There are important things to think about if you’re eligible for, or already receiving, an Age Pension.
When determining your eligibility for the Age Pension, all financial assets are taken into account, whether they are held inside or outside super.
Any Age Pension you receive depends on the value of your assets and your income. The family home is exempt from the assets test, so if you sell it, you are converting a non-assessable asset (your home) into an assessable asset (cash). As a result, you could see your pension payments reduced. Speak with a financial planner if you’re unsure about whether your Centrelink entitlements may be impacted.
Who stands to benefit most by taking advantage of the downsizing contribution incentive?
Making a downsizing contribution will benefit retirees who want to contribute more to their super but are unable to because of existing caps or restrictions.
In particular, it will benefit those who:
- have large account balances
- do not currently meet the ‘work test’;
- are at or above the Age Pension means test caps (that’s because if you’re not entitled to receive the Age Pension, you won’t be too concerned about it affecting your eligibility).
Catch up Contributions – a great opportunity to help boost retirement savings.
From 1 July 2018, any unused concessional contribution entitlement can be carried forward and used within the next five subsequent years (That is, unused amounts accrued from the 2018/19 financial year onwards will be able to be carried forward).Commonly known as catch-up contributions, the measure can be used by any member whose total superannuation balance is less than $500,000.
Catch-up contribution example
Alex, whose super balance is less than $500,000, has an unused concessional contribution entitlement of $20,000 from the 2018/19 financial year. He can carry this unused entitlement into 2019/20. Assuming the concessional contributions cap remains at $25,000 for 2019/20, Alex can make $45,000 worth of concessional contributions in 2019/20 ($20,000 carried forward from 2018/19 plus $25,000 pertaining to 2019/20).
Understanding the opportunity
The new measure helps unlock opportunities.
Casuals and part-timers, and those who’ve been out of the workforce, are at a natural disadvantage in terms of retirement savings. Under the new measure, concessional contribution entitlements that would have previously lapsed can be used once your employment situation improves.
There’s also opportunity with associated tax deductions. From 1 July 2017 all members will be able to access tax-deductible super contributions. This means any personal contribution (apart from salary sacrifice which already enjoys tax concessions) may be claimed as a tax deduction if you also lodge with WA Super a Notice of Intent form. This in combination with the catch-up measure provides greater capacity and flexibility to contribute and tax-deduct in order to offset taxable capital gains and other forms of taxable income.