Case Study - Downsizing to upsize retirement

BackgrounD  

Joan and John* aged in their early seventies were looking for ways to make the most of their savings in retirement. They had approximately $900,000 in superannuation and some savings, however most of their net wealth was tied up in the family home. With their adult daughters living independent lives with their partners, Joan and John were looking to downsize the family home and buy a new town house.

Overview

Joan and John wanted to sell the family home in Indooroopilly and make a sea change. While they knew they would do well financially from selling the family home, they were concerned about how to best manage the proceeds from the sale. Their goal was to have sufficient funds for their retirement lifestyle, without relying on a pension, as well as provide for their daughters after their passing.

As John and John were no longer working and over 67 years of age, they knew they were not eligible to make before-tax or after-tax contributions to boost their super, and were concerned about not being able to make the most of a tax-free income through their super.

Our Process

Matthew Lane, Principal Adviser encouraged Joan and John to discuss their retirement goals in detail. Through these in-depth discussions, Matthew was able to ascertain that they wanted to move across town to be closer to their adult kids, and that they were keen to remain active in retirement helping with grandchildren, playing golf and travelling.

Joan and John were worried about how they would fund a deposit for a new property particularly if their existing family home didn’t sell at the same time. They had discussed lending options with banks, but due to their age and low cash holdings, they were knocked back.

Matthew immediately identified the potential for Joan and John to withdraw some of their superannuation that could be used towards a deposit to secure lending on the new property. Joan and John had considered this but didn’t want to be left with a large sum of cash in their personal accounts once their family home sold.

Matt provided advice around the Government’s downsizing incentive scheme that could allow Joan and John to build their superannuation savings for retirement. Through the scheme both John and John could contribute $300,000 to their super from the proceeds of selling their home.

While Joan and John were no longer eligible to make contributions to super as they are over 67 and not working, utilising the ‘downsizer’ contributions enabled them to use the wealth tied up in their home to build their super balance after the withdrawal for the home deposit. And, without the usual restrictions associated with super contributions.

This scheme enabled them to boost their super balance so they could enjoy a tax-free income stream.

Although referred to as the ‘downsizer’ rule, there is no requirement to take it literally and downsize your home or for that matter, re-enter the property market. This enabled Joan and John to take their time finding their new home.

Matthew also looked beyond Joan and John’s initial needs for a finance solution and creating tax-free income streams for enjoying their longer-term financial goals. Matthew explained the importance of having an Estate Plan, including the most appropriate way to hold their superannuation and other assets, including trusts, to benefit their nominated beneficiaries.

While they had a Will in place, it did not cover their superannuation funds and other assets held in a trust.

Matthew took the time to explain how their estate should be structured to take into account the tax implications associated with their wishes, and presented more tax-effective alternatives for passing on assets to their daughters.

Using their actual financial information, Matthew outlined Joan and John’s current scenario, to illustrate the potential negative taxation implications that could affect their daughters’ future financial wellbeing. Matthew also outlined how funds passed onto their daughters could be protected in the event of a marriage breakdown.

The Outcome So Far

Joan and John withdrew $400,000 from superannuation to use as a deposit which assisted them to secure finance and purchase their new home. They purchased a town house for $1 million. Six months later they were able to sell their family home for $1.2 million and contribute a total of $600,000 to their superannuation utilising the downsizer rules. With the leftover funds from the sale, they were able to payback the mortgage debt to the bank.

The downsizer contributions boosted their super by $200,000. Joan and John are now enjoying retirement, and drawing a tax-free income of $70,000 per year. As an added benefit, they were able to utilise this opportunity to convert a large amount of the taxable component within their superannuation to tax-free. From an estate planning point of view, potentially this will save their daughters having to pay 15% tax plus Medicare Levy on the taxable component upon their passing. A potential saving of $68,000 (17% of $400,000).

Joan and John also have peace of mind that they have appropriate provisions in place for their daughters, having taken care of their Estate Plan. They also feel confident in the knowledge that they now have appropriate documentation in place should they be unable to make decisions for themselves in a medical emergency.

(*Clients’ names have been changed to protect their privacy)

Lane Moses Pty Ltd ABN 56 092 186 117 trading as Wealth Fundamentals and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306 Australian Credit Licence No. 357306.

The information (including taxation) contained within this document does not consider your personal circumstances and is of a general nature only – unless otherwise stated. Wealth Fundamentals strongly suggests that you should not act on it without first obtaining professional advice specific to your circumstances. This information is based on our understanding of legislation at the time of writing. Such legislation may be subject to change. This publication cannot be reproduced in any form without the express written consent of the author.