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Downsizing: Making the most of retirement

David Yeomans | March 2021

Article | 6-minute read

Downsizing may provide an opportunity to tap into accessible money, which if handled well, could support a more comfortable retirement.

Empty nest syndrome is a very real experience for many people once their kids grow up and move out of the family home. Suddenly all the bedrooms are no longer necessary, there are less cars in the driveway and the extra space seems somehow wasted.

As retirement draws closer, freeing up cash committed to a mortgage or sitting within the value of your family home is a common move as couples decide to sell up and size down. Downsizing may also provide an opportunity to tap into accessible money, which if handled well, could support a more comfortable retirement.

Planning what you want your retirement to look like needs to happen before you leave the workforce, to ensure you are spending and saving with foresight and maximising the money you have available. While downsizing with financial planning in mind is important, you should always consider how these changes will affect your personal priorities as well.

I’ve been working as a financial adviser for more than twenty years and have seen a lot of people go through the process of downsizing. With the right planning and goal setting in place you can make sure this financial decision looks at the bigger picture and maximises your long-term financial position - it isn’t always as simple as selling up and buying a smaller place. Over the years, I’ve picked up a few tips and tricks to help get the process moving.

Should you consider downsizing?

Deciding if downsizing is the right move for you and your family begins by having an accurate understanding of your current financial situation, what you want your future to look like, and where increased cash flow might help.

If you sell the family home and free up some of the equity you may be able to make a downsizer contribution of up to $300,000 to your superannuation, even if you are otherwise no longer eligible to put money into super. When I tell people about this option it can be a real game-changer and while there are certain conditions of eligibility, this may offer a considerable opportunity to increase your retirement funding and take advantage of the significant tax benefits superannuation offers.

Some of the requirements include: you must be aged 65 or over, you or your spouse must have owned your home for ten years or more, you must have lived in the home at some point and you must make the contribution within 90 days of settlement. It can be a great strategy to turbo-charge your super balance.

Don’t forget aged care expenses

When you retire, aged care living might be the furthest thing from your mind, however, when your family home is likely your largest financial asset, it is important to understand what long-term impact this may have on your financial security once a sale proceeds.

Your home is treated differently from all your other assets if you need to enter aged care. If you are married or in a de facto relationship and one of you remains in the home, then it will be exempt from assessment. However, if you choose to downsize, and as a result, put extra funds into your super or bank account, you will have increased your assessable assets. This could lead to you having to pay higher aged care fees.

A financial adviser can work with you to maximise your opportunities and piece together all the information you’ll need before you sell your family home, protecting a sizable nest egg and your financial security. 

Granny Flats - consider capital gains tax

There are likely to be financial benefits to downsizing but you want to consider how this will affect your personal arrangements as well. For example, if you’re thinking of building a granny flat you should also consider the associated capital gains tax (CGT). CGT is a tax paid based on the difference in value between the time you buy a property and the time of sale.

Don’t get me wrong, there are many benefits around downsizing to a granny flat. This allows you to build an additional property on the land of your family or close relation - cutting out the cost of land and letting you live independently - while also having the support of your family nearby.

However an important early decision is whether a formal agreement around the granny flat will be put in place. A formal agreement between you and your family is important for you, it’s kind of like a prenup for downsizers and gives you a level of security. However on the other hand this can expose your family, the land owner, to potential CGT if and when they sell their family home.  

What I’ve seen happen with clients in the past, is that in order to avoid the potential CGT issue associated with a granny flat being built, no formal agreement is put in place. The downsizer can then be left with an issue if the family decides to sell, the land isn’t theirs, even if they’ve funded the entire build of the flat - leaving them with nowhere to live and out of pocket the cost of the granny flat.

This is where the Government proposal to cut CGT for granny flats with a formal agreement comes in, removing the potential CGT liability for the family, and hopefully encouraging all builds to be documented with a formal written agreement. At this point the federal legislation is still being worked through but if approved it will be put in to place from 1 July 2021 - removing CGT from granny flats where they provide housing for older people or those with permanent disabilities.

It is important to note however that it will only apply to family relationships or other personal ties - it can’t be used commercially. If CGT is removed, this could greatly boost the appeal of downsizing to a granny flat.

Some things to avoid when downsizing

Partnering with a trusted financial adviser who understands what you are working towards ahead of making major financial decisions is a useful way to avoid unforeseen obstacles and costly oversights. The process of selling your home and buying a smaller one is never as simple as it seems, and unplanned costs can add up quickly. I’ve seen many people neglect to take into account the costs of selling their home, agents fees, removalists, buying new furniture for a smaller property and then you have stamp duty on the new home. These extras can add up very quickly and reduce the amount of money they had planned to be freed up.

This in turn may impact the lifestyle you want to lead in retirement. Though we are constantly reminded to live in the moment, when it comes to future-proofing your financial assets for retirement, no matter how far off this may seem, there is no better time than now to consider things 10, 15, or even 20 years in the future. The easiest way to streamline considerations and ensure you are equipped with all the necessary information is to speak with a professional and plan your future today.

ANZ's Financial Advisers can work with you to develop a plan as unique as you are to build your wealth. At ANZ, we are committed to helping Australians achieve their life goals and improve their financial wellbeing. Find out more and book an appointment

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