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There are often upsides and downsides in any piece of legislation, especially when it comes to superannuation.

       

That's the case with the Federal Government's “downsizer measure” announced in the 2017-18 budget, which came into effect on 1 July, 2018.

On the surface, there are significant upsides for individuals and couples wanting to top up their superannuation accounts either in retirement, or just before.

The measure allows individuals aged 65 years old or older, who meet specific eligibility requirements, to contribute up to $300,000 into their superannuation using the proceeds from selling their home. Couples can contribute up to $600,000, and a downsizer contribution can still be made even if one's total super balance is higher than the Government's mandated $1.6 million pension transfer balance cap.

There are various rules around the legislation, including that the home sold must have been owned for at least 10 years, and contributions into superannuation need to be made within 90 days of receiving the proceeds from the sale.

The downsizing data

To put some context around this article, we contacted the regulator of the downsizer legislation, the Australian Tax Office (ATO).

Since coming into effect 18 months ago, neither the Government nor the ATO has published data on how often the home downsizing measure has been accessed. However, the ATO has advised that, as of 17 January, 2020, it had received $2.19 billion in downsizer superannuation contributions on behalf of 9,429 individuals.

The ATO says downsizer contributions have been reported for every state and territory, with 55 per cent of contributions having been made by women. The average superannuation contribution has been approximately $232,000.

But the regulator adds that, as its data is based on individual contributions, and there can be multiple superannuation contributions made for the same home, for example from a husband and wife, it does not have data on the number on homes sold since the legislation was introduced.

Based on the aggregated numbers, the downsizer measure is proving popular for some retirees. Adding more than $200,000 in additional contributions into superannuation by freeing up equity from a home, and which will generate tax-free income for those in pension phase, can go a long way to funding one's needs in retirement.

Yet, it's also important for individuals and couples considering the downsizer measure to fully understand the potential downsides of downsizing.

A potential pension trap

Having enough money in retirement to maintain a comfortable lifestyle is obviously an aspiration for most Australians.

Longevity risk – the risk of running out of money in retirement – is a clear danger for many.

Yet, while the home downsizing measure may seem attractive for those aged over 65 wanting to get more into their superannuation or pension account to offset longevity risk, it also presents potential financial risks.

Those risks primarily relate to eligibility for a full or part Age Pension, because a large cash injection into a superannuation account may result in a breach of the assets test rules.

Consider that the family home is an exempt asset when calculating entitlements for the Age Pension, while all other assets outside of the home including superannuation are taken into account.

Under what's known as the taper rate, Age Pension entitlements are reduced by $3 per fortnight for every $1,000 in assets over the Government's asset test thresholds.

The current assets test limits are shown in the table below.

Full Age Pension Homeowner Non Homeowner
Single $263,250 $473,750
Couple $394,500 $605,000
     
Part Age Pension Homeowner Non Homeowner
Single $574,500 $785,000
Couple $863,500 $1,074,000

Source: Department of Human Services, limits effective 20 September 2019

 

The problem is that, in the current environment of record low interest rates and forecasts of lower investment returns for longer, some retirees could find that they are actually worse off.

Once an individual or couple breach the limits for the full Age Pension, their fortnightly payments will gradually reduce using the taper rate. Those on a part pension could find their payments cease altogether if they move above the maximum thresholds.

So, even with a higher superannuation balance as a result of their home sale, their total income stream could be less than what they received when they qualified for a full or part Age Pension.

Look before you leap

Average superannuation account balances at retirement already put many Australians close to the Age Pension assets test thresholds.

Using the data provided by the ATO, where the average downsizer superannuation contribution has been around $232,000, it's likely that some of the individuals and couples that have taken up the measure will have breached the maximum assets test levels.

What's most important for individuals and couples considering the downsizer measure is to review your personal circumstances to determine if it is going to work for you financially.

Do the numbers stack up? Keep in mind that any additional tax-free superannuation income earned in pension phase may be completely offset by a loss of Age Pension income if you breach the assets test rules.

For those wanting to downsize, how your home proceeds are reinvested, to maximise investment returns in retirement, is key.

It's therefore essential to seek out professional financial advice before proceeding, especially with respect to social security means testing.

 

 

Tony Kaye
Personal Finance Writer, Vanguard Australia
18 February 2020
vanguardinvestments.com.au

 

 

Following confirmation from the government that legislation to extend the work test exemption to age 67 will be passed by the end of the financial year, SMSF professionals should hold off on large contributions for 65-year-old clients to extend their ability to contribute to super for longer.

           

Addressing the SMSF Association National Conference 2020 on the Gold Coast on Tuesday, BT head of financial literacy and advocacy Bryan Ashenden said the extension of the exemption would mean clients could trigger the bring-forward rule and make up to $300,000 worth of contributions up to age 67.

As a result, it may be worth holding off on triggering the bring-forward for 65-year-old clients to maximise their ability to contribute up to the non-concessional cap until they reached age 67, Mr Ashenden said.

“Instead of doing the $300,000 bring-forward, maybe we would only do a $100,000 contribution this year because we know the government is going to get the legislation through to bring in that work test deferral, which means no work test requirements and the ability to use your bring-forward until you turn 67,” he said.

“So, if [a client] is currently 65, we might be better off to only do a $100,000 contribution now instead of $300,000 because next financial year we could then do the other $300,000.”

While relying on rules which were not legislated yet was not ideal, Mr Ashenden said the consequences for clients who missed out on additional contributions through not utilising the new rules could be significant.

“You have to be careful because if you used the $300,000 this year, you’re not going to have that ability to get the $300,000 down the track unless you can utilise the work test exemption in a future year, which means you would have to go back to work,” he said.

“It’s important to remember because if you trigger it this year, if you turn around to your client who has turned 65 in this financial year and say based on current rules you could make a contribution of up to $300,000, and then the rules change to say it’s different from 1 July next year, you’ve knocked them out of the ability to get an extra $200,000 into super.”

The comments come following confirmation from assistant Minister for Superannuation, Financial Services and Financial Technology Jane Hume earlier at the SMSF Association National Conference that legislation to extend the work test exemption to age 67 would be passed before the end of the 2019 financial year.

 

 

Sarah Kendell
20 February 2020
smsfadviser.com

 

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A question that comes up for many people saving for retirement is how best to invest when they only have small amounts of money available at a time.

         

For some, it might be because they are early in their investing journey, just out of school or starting in the workforce. Others might be raising their sights to investing after paying for an education. Some are thinking about retirement as they close in on paying off their home.

The common thread is that large sums of money aren't available for investing in one go. Rather, the hope is to put away something every month and watch it grow.

So how best to proceed?

The first step is setting goals by knowing where you want to end up. Planning sounds dull but it is critical to have clarity around where you are, where you want to be and how long you have to get there. Your plans should also include contingencies for when things go wrong.

Then, make sure you focus on building an emergency fund.

Former heavyweight champion Mike Tyson has a famous line: “Everybody has a plan until they get hit. Then, like a rat, they stop in fear and freeze.”1

Getting 'hit' could mean a job loss, a medical emergency or any other unplanned essential spending. It can derail the best of plans. An emergency fund protects from this risk. It should be kept safe from market risk and easy to access quickly.

It's also important to continue to make debt repayments. The higher your debt, the less is left over each month to save. In retirement, debt payments directly reduce your spending power. Many financial advisers over the years have said the first task they work on with many new clients is:

  • understanding where the money goes (i.e. budgeting)
     
  • getting debt under control because only as debt is manageable, is it realistic to start thinking about investing.

This is when the critical step of moving from being a saver to investor can occur.

When there are only small amounts spare each month, the single most critical thing is to find investments that have low fees.

Fees eat away at investments and this is especially true when your monthly contributions are low.

Exchange traded funds are a great low-cost investment that can be purchased with as little $500 to start with. And, depending on the ETF you buy, they can offer the benefit of instant road market diversification as well.

They come with one main caveat however – watch your brokerage costs. At $500, $10 of brokerage means the ETF will need to rise 2 per cent just to break even. If your next purchase is $100, that $10 brokerage means you need a 10 per cent gain to recover your funds.

That can get expensive over time.

An alternative for people with regular small amounts to put away can be unlisted managed funds. Minimum investments in managed funds are higher than ETFs—often between $2000 and $5000. But they have the benefit that some managed funds allow fee-free regular contributions that are often as low as $100.

Ultimately the decision is a balance of how much you have to start with and how often you intend make further small contributions.

Once the vehicle is decided, the next decision is asset allocation, or how much of your investments are allocated to an asset class like stocks, property or bonds.

One of Vanguard's most closely-held tenets is that diversification is one of the most important predictors of investing success. Investing in managed funds and ETFs offers a wide range of diversification at very low cost, allowing small investors to access professionally managed, well diversified portfolios in a single investment.

Some people procrastinate about starting on the investing journey because they don't have a sizeable pool of savings but ultimately you are better off investing small amounts over the long term, than not at all.

 

Written by Robin Bowerman
Head of Corporate Affairs at Vanguard.
24 February 2020
vanguardinvestments.com.au

 

1. https://www.sun-sentinel.com/sports/fl-xpm-2012-11-09-sfl-mike-tyson-explains-one-of-his-most-famous-quotes-20121109-story.html

 

This animated chart is simply amazing but some world events could have a negative impact.  Even so, it's fascinating to see how the world might change into the future.

Simply click on the image and see how global economies are expected to change between 2010 and 2100.  

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