Delayed plans to downsize now in sight for Australian retirees

COVID-19 continued to be a dominant theme in Australians’ conversations with their financial advisers in the final quarter of 2020, as clients realise their plans to downsize for lifestyle or health reasons.

“Clients who are looking to sell the family home are asking their advisers about what the impacts may be on their superannuation and age pension,” said Tim Howard, Technical Consultant in BT’s Technical Services team. One of the most frequently asked questions from advisers to the team, who fielded over 2000 adviser queries from September to December 2020, was on the financial repercussions of selling a client’s main residence.

“During the worst of the pandemic, it seems many retirees stayed put and delayed any decision to move,” Mr Howard said. “With the pandemic situation mostly under control in Australia, along with positive news about the development of viable vaccines, retirees have been feeling more confident and are putting their plans in motion.”

The effects of COVID-19 have also flowed through to the delay in the passing of legislation relating to changes to bring-forward contributions; while travel restrictions have caused some Australians to review their foreign assets and income streams.

Those are among the top 5 topics on which advisers have sought technical advice from BT’s Financial Literacy and Advocacy team in the past quarter.

1. Downsizer contribution to superannuation

Clients who are over the age of 65 may be eligible to make a downsizer contribution to their super fund, following the sale of their main residence. Advisers have been asking BT about the details on the eligibility criteria of this measure.

The downsizer contribution will not count towards a client’s non-concessional contributions cap, so it can still be made even if they have a total super balance greater than $1.6 million. The contribution is however limited to $300,000 or the proceeds of sale, whichever is the lower amount.

Advisers should keep in mind that clients need to make the contribution within 90 days of receiving the sale proceeds. While this time may seem sufficient at first, the process of buying and selling a home, along with tasks such as making family and healthcare arrangements, can mean that taking advantage of this contribution strategy is placed on the backburner.

“Moving house can be a busy and challenging period,” said Mr Howard, “so the key is to plan ahead. Advisers can encourage their clients to discuss early in the process whether a downsizer contribution to super should be part of their financial plan.”

2. Exempting the proceeds from the sale of the principal home

Another consideration for clients who are downsizing is the impact of selling the family home on their eligibility for the age pension. If a client has sold their principal home, and is intending to use the sale proceeds to buy, build or renovate a new principal home, then the proceeds can be exempt under the assets test for 12 months – and therefore the sale may not adversely affect their age pension entitlement during that time.

3. Superannuation guarantee amnesty

Under a one-off amnesty which ended on 7 September 2020, employers could self-correct historical underpayments of the superannuation guarantee (SG). The catch-up payments have resulted in some employees exceeding their concessional caps, leading to questions on how to resolve this problem.

Advisers can apply to the ATO to disregard or re-allocate the payment/s to the financial year in which the contribution should have been made, for cap purposes. “Importantly, if a client receives an excess contribution notice this year, they need to respond within the time prescribed,” Mr Howard said. “If they know they are going to go over the cap, it’s best to make an application for an excess contributions determination ahead of time, and not wait for the notice.”

4. Bring-forward contribution changes

Although it has an effective date of 1 July 2020, the legislation on the proposed measure to increase the age – to 67 years old – for an individual to make a bring-forward non-concessional contribution to super, still has not passed Parliament.

The volume of adviser queries on this subject remains high, as advisers question whether the start date will be amended and whether a grace period will be put in place, and even whether the proposed legislation is still expected to become law.

“The legislative process has been delayed, however there is still a high level of confidence that the critical component, regarding the bring-forward non-concessional contribution to super, will pass, as it’s not contentious,” Mr Howard said. “It’s more a matter of when.”

Parliament is currently due to reconvene in February 2021.

5. Treatment of foreign assets, pensions and income streams

Many Australians maintain links to another country. Some own property overseas or receive a pension from a foreign government where they may have previously worked. Normally, they may travel to that country regularly and perhaps use their foreign sourced income to fund their trips. Due to the restrictions on travel during COVID-19, some may be leaving their income streams as is, while others are looking into selling their assets. Advisers are being asked how these will be treated by Centrelink in relation to clients’ eligibility for the age pension.

Broadly, foreign assets and income streams are captured in Centrelink’s assessment for eligibility, however the treatment can be different depending on the country so, as always, it’s best to thoroughly check each client’s situation.

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