All posts by Robert Wright
Downsizing your home? Understanding the downsizer contribution
By Robert Wright /August 26,2021/
Downsizing the family home is often part of the longer-term financial plans for many older Australians. But did you know that you could consider investing the proceeds of the sale of your family home to your super – depending on your age and circumstances – as a downsizer contribution?
What is a downsizer contribution?
If you’re aged 65 years or older, you may be eligible to make a downsizer contribution of up to $300,000 to a complying super fund from the proceeds of the sale of your primary residence, which is owned for 10 years or more.
A downsizer contribution doesn’t count towards any of the contribution caps – and can still be made even if a person has total super savings greater than $1.7 million, or if they do not meet the work test requirements. It is a once-off option and doesn’t apply to the sale of any residences in the future.
Your spouse, provided they are also aged 65 years or older, can also make downsizer contributions to their own super, of up to $300,000 from the same proceeds, even if they are not an owner of the property. To do this, the sale price is key, as your couple contributions cannot be more than the total sale price of the property.
The benefits of the downsizer contribution:
No work test requirements
There is no requirement to meet a work test or work test exemption for this contribution, which makes it ideal for those aged between 67 and 74. It is even more appealing if you are aged 75 or over, as outside of this opportunity, you can no longer make voluntary contributions.
Contribution caps don’t apply
It doesn’t matter how much you already have in your super – the total super savings test (must be $1.7 million or less to make after-tax contributions) doesn’t apply for downsizer contributions.
May be more tax-efficient
The downsizer contribution is an after-tax contribution, so no tax is paid on the way in. And because you are over 65, it is returned tax free when you withdraw the funds in the future.
You don’t have to buy a new home
The money you make from the sale doesn’t have to be used to purchase a new home, and there is no need to move to something smaller or cheaper. If it involves the sale of a previous principal residence (that is now an investment property), there is actually no need to move at all.
Who is eligible?
In addition to the age 65 threshold, there are a number of other important criteria to be met.
You must sell a property that is located in Australia, and you must have owned the property for at least 10 years.
When you sell that property, you need to be eligible for some form of exemption from capital gains tax (CGT) on the sale of the property under the “main residence” provision. Basically, this means the property needs to be your principal place of residence for at least some time during its ownership.
If you purchased the property before 20 September 1985 (so that CGT doesn’t even apply), you still need it to have been your principal place of residence at some stage during ownership.
Keep in mind, it also doesn’t matter if the exemption from CGT is a full or partial exemption, which means the property could have been an investment at some stage during your ownership of it.
What a downsizer contribution could look like
Here are some hypothetical examples of how downsizer contributions could work in different situations.
Example 1:
Martin and Sharon are both aged in their 70s, own their home jointly and have lived in it for 25 years.
They sell their home on 1 August 2021 for $550,000 and the settlement date is 13 September 2021. They are exempt from capital gains tax (due to the home having been their primary residence).
Under the downsizer contribution measure, within 90 days, Sharon makes a downsizer contribution to her superannuation of $300,000 while Martin contributes $250,000 to his superannuation.
Though the cap on downsizer contributions is $300,000, Martin only contributed $250,000 because the combined contributions cannot exceed the sale proceeds of their home. They could have also split the contributions evenly, contributing $275,000 each.
Example 2:
Roger is aged 66, Mel is aged 63, and they live in a home purchased by Mel 20 years ago.
Mel sells the home for $900,000 on 15 July 2021 and the proceeds are exempt from capital gains due to it being their primary residence.
Roger can make a downsizer contribution of up to $300,000 within the 90-day period but as Mel is under age 65, she is unable to make a downsizer contribution.
Does it impact the Aged Pension?
If you qualify, or are hoping to qualify for the Age Pension, the impact of selling an asset needs to be considered. The value of your main residence is excluded from the assets test, however if it is sold, and some of the proceeds added to your super, that value will then be assessed and may reduce your age pension benefits.
How do you make a downsizer contribution?
If you are eligible, you’ll need to complete a downsizer contribution form and provide this together with or before your contribution, to your complying superannuation fund so it can be correctly classified. The form is available from the ATO website. You can elect to notify your super provider in advance of the contribution also.
It’s important to be aware of the timing of your contribution into super. The contribution must be made within 90 days of receiving the proceeds of sale (or longer permitted period), which is usually the date of settlement.
Source: BT
Retirement Realities: Five Tips for Rebuilding a Super Future
By Robert Wright /August 26,2021/
Australians will need to rebuild their superannuation and retirement savings, after withdrawing more than $36 billion in early super release payments in 2020, according to Colonial First State’s Retirement Realities Series.
The research found that the largest number of early super payments were made to Australians under age 40 with Australians under 30 receiving nearly one-third of these payments.
The research also revealed that Coronavirus had a big impact on the retirement savings of women, with the average super balances for men consistently higher than women – $110,000 vs $93,000 in December 2020, with a faster rate of growth for men.
But there is positive news. Half of Australians who withdrew their super early, have now made headway in making contributions either through their employer or by making their own contributions.
Despite the challenges there are a number of practical ways for Australians to get their super back on track and live a comfortable life in retirement.
Five Tips to Consider to rebuild your Super
1. Make small and regular top-ups
Even a small contribution to your super makes a big difference in the long term and to how much money you have in retirement.
How does it work? Your employer can pay some of your salary into your super before tax is taken out, instead of our bank account. And yes, that means a tax benefit. It is also a very simple and effective strategy.
If you withdrew $10,000 from your super, making additional contributions of just $20 per fortnight pre-tax (salary sacrifice) at age 30, can mean an additional $25,000 at retirement.
2. Seek advice
Advice can come in different shapes and sizes. Make the most of free online resources and calculators that provide useful tips and information.
A financial adviser can also help you plan for your future. According to Colonial First State, women who received financial advice made a 199% higher average voluntary contribution in 2020 compared with women who did not get advice.
Similarly, the research found that men who sought financial advice were 85% ahead of those who didn’t get advice.
3. Manage your debts
The majority of people who accessed their superannuation early used it to pay their mortgage or rent (29%), household bills (27%) or credit card bills or personal debts (15%) . It might be a personal loan, a credit card or a mortgage (or a combination of all). The general rule is that it’s always good to pay off any high-interest debts first.
4. Take an interest and get control
Understanding what measures are available can make a big impact on how much money you have in retirement. For example, if you earn less than $54,837 you may qualify for a government co-contribution of up to $500 where you make a non-concessional contribution in a year.
Other measures including spousal, after-tax and concessional contributions which again could deliver tax breaks or qualify you for government contributions. Talk to us about the different ways you can grow your super.
5. Check in on your super with online reminders
Just like scheduling diary reminders for work or social events or for bill payments, set yourself diary reminders to check your super every month. It is easy to set up these regular reminders on your online balance. Think of it as a ‘reality check’ on whether you are on track for a comfortable retirement.
Source: Colonial First State
How much do I need in my emergency fund?
By Robert Wright /August 26,2021/
In these uncertain times, it pays to have money set aside to give you peace of mind that if your income drops, you still have ample funds to pay for your everyday expenses until you get back on your feet again.
A good rule of thumb is to have enough money for three months of expenses in your emergency account. The amount you set aside, however, will depend on your circumstances.
The Henderson Poverty Line, the amount of money you need to get by each week, including how much you need to keep a roof over your head, is a good place to start to figure out how much you need to cover the basics in the event of an emergency. This is a benchmark that was first developed in 1973, which is now widely considered to be the benchmark for the disposable income Australians need to support themselves. Its figures show:
- Single people need $542.92 a week
- Couples need $726.27 a week
- A family of four needs $1019.70 a week
These figures are a guide only, and your expenses are likely to be higher, so it’s worth looking at your actual expenses to figure out how much to set aside. You can do this by:
- Figuring out the amount of money you have spent by reviewing your transactions in online banking across a three-month period.
- Dividing up costs into buckets like food, rent or mortgage payments, other loan repayments, transport and car costs, health and insurance premiums and energy and phone bills.
Once you know how much you’ve spent on these basic expenses you can work out how much you need to save in your emergency fund. It’s a good idea to add a contingency amount over and above this amount in case other expenses arise.
Safe keeping
Now you’ve figured out how much to save in your emergency fund, it’s time to decide where to store these funds. Here are some options:
- Mortgage offset account or redraw facility: storing your emergency funds in an account linked to your mortgage helps reduce the interest you pay and the time it will take to pay off your mortgage.
- High interest savings account: this is an option if you rent and can help to add to your emergency funds over time as you will earn interest on the money. Look for an account that pays extra interest if you don’t make withdrawals.
When to access your money
Once you’ve saved up your emergency money, it’s useful to put in place some guidelines about when to spend it. This is important as everyone has different ideas about what constitutes an emergency, depending on their views, as well as their level of wealth. Here are some ideas:
- If you lose your job and need funds to pay for your mortgage or rent.
- If you suffer a health emergency or need urgent dental work and need money to pay for treatment.
- If your car needs urgent repairs that are not covered by car insurance.
- If a family member falls ill or suffers an accident and you need to take time off work to look after them.
If you decide to dip into your emergency savings for one of these or another reason, the idea is to spend the money on daily living expenses like food and bills. Emergency money isn’t usually for play money or for entertainment purposes. You can always set aside another pot of money for this purpose.
Emergency funds are a great way to give you a sense of financial confidence and the sense you will be able to meet your obligations through life’s ups and downs.
Source: BT
Adding more to your retirement savings: is it worth it?
By Robert Wright /August 26,2021/
There’s no denying that being proactive with your super may be key to increasing your retirement savings.
As an investment vehicle, super can offer significant benefits thanks to the magic of compounding interest. It also provides one of the best tax structures available.
Why super offers much promise for retirement saving
Adding more into super is not only a good way to invest your income, it also helps your retirement savings grow so that when you do retire, your money will still be worth something.
Depending on your income and how much you can afford to contribute, adding more into your super may be a decision that could benefit you in retirement.
Why? It boils down to two key things.
Magic of compound interest
The first, is the magic of compounding interest – the process of earning interest on your interest and so on.
For example, if you invested $10,000 at 5 per cent per year, each year you would earn $500 in simple interest. However, when you add in the magic of compounding and allow the $500 interest earned in the first year to be added to your account balance, then repeated each year during the 5-year period, after 5 years you would have earned a total of approximately $2,762 in interest (compared to $2,500 in interest after 5 years using simple interest). This would give you a total of $12,762 after 5 years.
But that’s not all.
One of the best tax structures available
From a tax point of view, super can be incredibly powerful.
By making extra contributions to your super fund using your pre-tax income, up to the current annual contribution cap of $27,500 (2021/22), you could benefit from those contributions being taxed at just 15 per cent. This is potentially a lot less than the personal tax you would pay on your income.
If your spouse is a low-income earner, there are tax benefits you could gain too for making a contribution to their super.
But like most good things, super is not without its drawbacks.
Limitations of super for retirement saving
Super does have some limitations as an investment vehicle. For instance, you can only make up to $27,500 in super contributions before-tax in the 2021/22 financial year (this amount includes your employer’s contribution of 10 per cent of your salary) or up to $110,000 in after-tax contributions in a financial year. You may be liable for more tax if you exceed these limits.
There are also limitations on when you can access your super.
Get support
Planning for your retirement can be a complex and a challenging area to get your head around.
So if you’re keen to supercharge your retirement savings, but aren’t sure how to go about it, then speaking to a financial adviser can be a good way to go.
Bottom line: Being proactive with your super will likely make a significant difference to the size of your final nest egg.
Source: BT