Downsizing and super: how to make the move work for your retirement

Selling the family home can be an emotional decision, but for many Australians it also represents one of the largest opportunities to strengthen their retirement position.

The government’s downsizer contribution rules allow eligible homeowners to transfer part of the sale proceeds into their superannuation in a tax-effective way. Understanding the finer points can help you decide whether this strategy fits your broader retirement plan.

Why downsizing can make financial sense

For people approaching or already in retirement, the family home often holds substantial untapped equity. Shifting to a smaller property can release capital that could otherwise sit idle. Adding those funds to super can offer significant tax advantages, since superannuation earnings are generally taxed at just 15 per cent in the accumulation phase and may become tax-free once converted to a pension account.

Superannuation is often one of the most tax-effective environments for long-term investing, so using the downsizer contribution rules can improve your retirement income potential compared to holding the money in a bank account or investment portfolio outside super.

How the downsizer contribution rules work

If you are 55 or older and have owned your home for at least ten years, you may be eligible to contribute up to $300,000 from the sale into your superannuation. For couples, that amount doubles to a combined $600,000 if both individuals meet the criteria.

To qualify, the home must generally have been your main residence for most of the ownership period, meaning you lived in it rather than renting it out. The contribution needs to be made within 90 days of settlement, unless an extension is approved, and you must provide your super fund with a completed Downsizer Contribution into Superannuation form.

Importantly, this contribution does not count toward your usual concessional or non-concessional caps, and it can be made regardless of your total super balance. Even those aged over 75 can use this rule, which is an exception to the usual contribution age limits.

The potential tax benefits

Beyond the immediate ability to move funds into super, the main attraction lies in the tax treatment. Super earnings are taxed at a maximum of 15 per cent while you are still in the accumulation phase, compared to marginal rates that can reach up to 45 per cent outside super. Once you start drawing a pension from your fund, both investment earnings and withdrawals are generally tax-free.

This structure can make a significant difference over the course of retirement, particularly if the proceeds of your home sale would otherwise sit in a taxable account generating interest or dividends.

What to watch for

Despite the advantages, downsizer contributions are not always straightforward. There are several considerations to work through before deciding whether the move makes sense.

Impact on Age Pension eligibility
Your family home is exempt from Centrelink’s assets test, but once sold, the proceeds become assessable if placed in super. This can affect both the income and assets tests used to determine your Age Pension entitlement. In some cases, a person who previously received a part pension may lose eligibility once their assessable assets rise. For others, the reduction in pension payments may be modest compared to the benefits of higher investment income. A financial adviser can model both scenarios before you sell.

Access to funds
Money contributed to super under the downsizer rules will generally remain preserved until you reach your preservation age and retire, or until you turn 65. If you are under that threshold, the funds may not be available for several years, so it’s important to keep enough cash or liquid investments outside super for short-term needs.

Investment risk
Superannuation funds invest across various markets, including shares, property and fixed income. Market movements can influence returns over time. If you have a low tolerance for volatility, consider reviewing your super’s investment mix to align with your comfort level before contributing a large sum.

Estate planning considerations
The home and superannuation are treated differently under tax law when passed on after death. A property can often be transferred to beneficiaries tax-free if it was your main residence. By contrast, superannuation death benefits paid to non-dependent beneficiaries may attract tax of up to 17 per cent on the taxed element and up to 32 per cent on any untaxed element. This distinction can be important when planning how your assets will be distributed.

Balancing lifestyle and financial goals

While the financial aspects are critical, it is worth acknowledging that downsizing is also a personal transition. You might choose to move to a coastal apartment, a smaller home closer to family, or a regional town that offers a slower pace of life. Each choice has financial implications as well as lifestyle ones.

It’s also worth remembering that not every downsize leads to a cash surplus. Depending on where you buy, transaction costs and price differences between markets can narrow the available funds for contribution. Careful budgeting and advice can help you see the full picture before you commit to a sale.

A considered decision

Downsizing can free up equity, simplify your lifestyle, and potentially improve your retirement income. Yet it can also introduce complexity in taxation, superannuation rules and Age Pension assessments. Each of these strategies can be valuable, but they can also be complex to implement. Seek personal financial advice if you think they may suit your situation.

If you would like to discuss how this applies to you, please contact our friendly team at Stream Financial.