Summary: Before January 1 this year, the financial consequences for individuals deciding to sell their home to make a one-off accommodation payment before going into aged care were the same as for those choosing to keep their home and use the rent to pay for their costs. That’s changed, and keeping your home can have huge implications.
Key take-out: There are no hard and fast rules, and the best pathway will depend on each individual's circumstances, assets and income needs.
Key beneficiaries: Retirees. Category: Retirement.
Decisions surrounding a move into an aged care facility can be highly emotional and sometimes need to be made suddenly or unexpectedly.
But, at some point in time, many of us will need to become decision-makers on behalf of our elderly parents or other family members.
Unfortunately, the landscape itself can be quite complex to navigate, from not only finding the right fit and coordinating the physical move, but also on the money side of things. Furthermore, a decision must often be made about the family home, which can result in juggling emotional and financial demands.
Over recent years the Government has made several changes impacting the level of social security available to retirees. Recently, and to add to the complexity, there have been further changes which directly affect those age pension recipients looking to keep and rent out their former home when they enter into residential aged care. The changes mean that previously advantageous strategies may require a rethink.
One-off payments vs periodic payments
A residential aged care facility will typically require an upfront lump sum payment (later refundable) in order to secure accommodation. The facility may allow a payment to instead be made on periodic basis (much like rent), rather than the upfront refundable option. So, for example, where one wished to keep the family home but didn’t have enough other cash assets to fund the upfront payment, they might instead opt to make periodic accommodation payments funded in part by the rental income they receive on the home.
Further, this scenario had previously also allowed the rental income to be excluded from the age pension assessment, in some cases making it a more advantageous strategy (a few financial calculations are required to determine this). The recent changes (introduced January 1, 2017) have in effect directly impacted this treatment of the home for age pension purposes.
Through the change, the Government served to address what was seen to be a misalignment with the treatment of rental income under aged care means testing. The result means there are now potentially lower pension entitlements for many individuals and couples.
Importantly, these rules only affect those entering residential aged care now. All others already in residential aged care prior to January 1, 2017 will continue to have the previous rules (the calculation of their entitlements and fees) applied.
Understanding the new rules
In summary, any rental income received from the former home from January 1, 2017 is included in the assessment of an age pension entitlement for someone entering into residential aged care and opting to pay a periodic payment.
Further, the value of the home would also be assessed as an asset for the purposes of the age pension. Note, however, that there is a two-year exemption on the assessment of the house as an asset, and this will remain. This means that from the time of entering into aged care, the value of the home will be excluded until the two-year period ceases, at which time it will become assessed.
So, while the impact on the age pension asset test would not in effect apply immediately, the impact of the rental income, as compared to before January 1, can mean a big difference for new entrants. In some cases, this strategy will eliminate a pension entitlement completely.
As an aside, the upfront lump sum accommodation payment (or RAD; Refundable Accommodation Payment) is not itself an assessed asset when it comes to the age pension. This means that selling the home and using the proceeds to pay the RAD is simply a better financial result in many cases. Note, it can also be possible to have some combination of the upfront and periodic payments.
Other changes on January 1, 2017
In addition to the above, the aged care changes came into force alongside tougher new asset test limits for the age pension. While the asset test free area increased, the rate at which aged pension entitlements taper off have also increased. This means that, for many people, their pension entitlement will have reduced substantially if it hasn’t been cut off altogether since January 1.
For example, a home-owning single person now ceases to have an entitlement at $546,250 in assets (excluding their primary residence), which has reduced from just under $800,000 before the changes.
Cash flow and the home retention strategy
Is it best to retain the home, or to sell it prior to entering aged care? If you’re confused by all the calculations and changes, you would be far from alone.
One of the key issues facing aged care residents will be managing their entry ‘cost’ against their ongoing costs and income needs.
There will be care fees associated with staying in a residential facility, and if coupled with a periodic accommodation payment this will require a steady flow of income or a liquid assets pool to draw upon.
Opting to keep the home may simply mean that the rental and other income are insufficient to cover it, particularly when factoring in a potentially reduced aged pension entitlement. While retaining the former home can begin as a priority, it needs to make sense in the numbers.
Unfortunately, there are no hard and fast rules that can be applied and what is appropriate will very much depend on each individual's circumstances, assets, income needs and so on. The recent changes are likely, however, to have an adverse impact on those age pension recipients wishing to retain and rent the family home. When the numbers are assessed, the changes will reduce the instances where this strategy will work.
What cannot be stressed enough is that when looking to enter residential aged care, the options need to be carefully considered on an individual basis.
The area is highly complex and, as always, seeking the input of a professional adviser is important.