Renting out the home is not the story it was
The family home has been in the sights of the government for some time. While not included in the means test for the age pension, the value of the home (subject to a cap and depending who lives there once the resident is in care) is taken into account when the government determines how much they will help with aged care costs.
Residents retaining their home and renting it out while in care, are now seeing an adverse impact on the means test for both the age pension and means tested care fees.
This means that if you consider renting out the former home when mum or dad are in care, the overall benefit is going to be diminished by the the impact on the Means Tested Care Fee, and the Centrelink Age Pension.
Meanwhile, selling the house free up cash that could help pay costs, but increase the amount of assessable assets for both tests.
It is worth doing the numbers, and there are still situations where the right path is clear cut - however the story is not as good as it was.
Changes in the Age Pension Assets Test
On January 1 2017, assets test changes changed pension rates for many Australians.
Meanwhile, the numbers for moving into residential aged care have changed too.
Funds paid by lump sum to the aged care provider as a Refundable Accommodation Deposit are not assessable for the Age Pension assets test.
For some residents, a more expensive room (i.e one with a high RAD), can actually deliver a better outcome due to the way the new Age Pension test works.
This is a great outcome for those Australians that have the opportunity to take it up.
Interest Rates Count
Buried in the story of whether to pay a Refundable Accommodation Deposit (RAD), or pay by Daily Accommodation Payment (DAP) is an interest rate that determines what the DAP will be. Essentially, for the amount of RAD the resident does not pay, they are charged an interest rate. This rate, known as the Maximum Permissible Interest Rate is currently set at 5.76% (until June 2017).
Now that is a lot higher than what you would get in the bank right now - so it makes sense to look carefully at how much of the RAD you can pay, and still have funds left over to manage the day-to-day costs of aged care.
Meanwhile, renting out the house may not be that helpful, so the house might be better sold and the proceeds used to pay the RAD. But then more assts enter into the pool for means tests.
It's worth going through the numbers.
The BBQ Moment
More often than not, and especially with changes in government policy in recent years, there are no hidden strategies to make a dramatic improvement on the way things appear.
Hopefully things can be tweaked a little where there is opportunity, or there can be a clear answer in the numbers as to whether one course of action is better than another.
Maybe you don’t want all the hassle and risk of being a landlord for only a few thousand dollars extra a year (provided everything goes to plan).
And when someone at a BBQ tells you about some story they heard where an unusual strategy resulted in huge savings, you want to be confident that you investigated all the options to make the right choice.
We can help.
Expect ongoing changes
Changes to means testing this year, as well as the ongoing focus on the wealth of older Australians says that the rules are going to keep changing. For families trying to work out how to manage aged care costs, a clear view of the rules and how they will affect the resident is essential.
Later Life Advice can help.