Downsizing? Consider these things before taking the plunge

Government policy makes it clear that retirees are expected to use the equity in their home as part of their financial resources. This can usually be done in either of two ways - by downsizing, or by taking out a reverse mortgage. Remaining in a large home that requires increasing maintenance may not be a realistic option, so let's think about downsizing.

Where you live affects how you live and it's something you can't change without moving again. So, think about the people and places you want to be close to (or far away from). Whether it is family, friends, the beach or a favourite club, identifying who and what you want to be close to can help you narrow down your where.

Next you'll want to think about what. Consider the accommodation itself, taking into account the spaces you'll need - A second bedroom if one person snores? Room for visitors? An outdoor space to enjoy your morning coffee?

Ask yourself, "How will I spend my time?" If you are thinking about moving into a retirement community there is normally an events calendar, so grab a copy and check if the activities interest you.

You may be fighting fit now, but it's wise to contemplate possible future needs, especially if your plan is to stay in your new home long term. Ask yourself, "What happens if I need care?" Modern homes such as granny flats and those within retirement communities are often designed with future care in mind. Others may not be, so check any potential new home for access challenges, such as narrow halls and doorways or cramped bathrooms.

No matter what form your new home takes - whether it's a freehold, strata title, leasehold, licence, or a granny flat arrangement - you will need to sign a contract. Your contract spells out your rights, responsibilities, and costs. Take legal advice and make sure you understand it.

Of all the downsizing options, granny flat arrangements can be particularly complex, as they involve family, are not necessarily on commercial terms, and if it goes wrong the whole family can be affected.

Once you know where and what, think about how much. It is simplest to work out your costs in terms of ingoing, ongoing and outgoing expenses, so you can see how much you will pay upfront, while you live there and when you leave.

Get to understand the expenses associated with different types of properties. In freehold and strata properties, factor in stamp duty on the purchase.

In a strata property, ongoing costs include owners corporation fees, and the potential for special levies. In retirement communities, there is the weekly or monthly fee that you pay, and often an exit fee.

This typically includes a Deferred Management Fee (DMF) as a percentage of either your purchase price or future sale price, and there can be shared capital gains or losses with the village operator, along with renovation costs, marketing and selling fees.

Armed with the knowledge of what your new home is going to cost, you can get a clearer view of the bigger financial picture.

This information is from the just-published second edition of Downsizing Made Simple, co-authored by Rachel Lane and myself. It is available to order in print, or to download as an ebook, from www.downsizingmadesimple.com.au, and will be available in all good bookshops for Christmas.

The website also has lots of useful exercises, checklists and calculators to help you on your downsizing journey.

You recently wrote about a couple who were both over 60. He withdrew $660,000 from his super fund and you said $515,000 of that would be taxable. Am I correct in thinking that is because he is over 60 and alive so he will not have to pay the death tax on the component? You also mentioned that the fund's earnings become part of the taxable component either in accumulation mode or pension mode. I could understand that if the earnings are in accumulation mode as the fund is paying 15 per cent tax, irrespective of age. Is there another 15 per cent tax applicable when the member dies if the balance is left to a non-dependent?

There are two issues here - the death tax on money left to a non-dependent and the calculation of the taxable and non-taxable components. A member benefit or a death benefit can have very different tax consequences. The former is a payment made in the normal course of business to a living member of a superannuation fund. A typical example is a payment to a member when they meet a condition of release such as retirement. This would normally be received tax free.

When the member is alive the components inside the fund may be taxable and non-taxable. Concessional contributions for which somebody has claimed a tax deduction and all fund earnings are part of the taxable component. The non-taxable component derives from non-concessional contributions which are normally made from after-tax dollars and from downsizing contributions. There is no entry tax on these contributions.

If the death benefit is paid to a non-dependent the tax is 15 per cent, plus Medicare levy. It's easily avoided by giving your power of attorney authority to withdraw your entire balance before you die and deposit it in your bank account.

We are retired and are self-funded. I have an allocated pension worth $600,000 from which I draw $1500 a fortnight (non taxable) and dividends from the shares in my name of $18,200 a year. I use the imputation credits to pay the tax. It is my understanding that if I sell any shares the capital profit will be added to my taxable income. Is there any way I can reduce or avoid having it added to my income?

The capital profit will be added to your taxable income in the year of sale less 50 per cent discount if you've owned the shares for more than a year.

What's great about shares is you can sell them in small parcels to minimise or eliminate capital gains tax and if some shares have a capital loss, you can arrange the transaction so any losses can be offset against the gains.

Talk to your accountant.