Aged Care changes in action
Coming into 2017, changes that affect how Australians pay for care were clearly flagged.
The changes to the assessment of Assets for the Centrelink Age Pension were clearly outlined, as was the new inclusion of rental income into means testing if aged care residents were renting out the former home.
We have also been in a very low interest rate environment for some time, so it is no surprise that money in the bank earns little to help offset aged care costs.
A few months into the year, and it becomes clear how these changes impact the way Australians pay for aged care.
Here are a few examples.
The Age Pension Kicker
A key feature of the new Age Pension Assets tests is just how quickly the rate of pension changes for a change in asset position. For Australians on the cusp of the Age Pension assets test limits, the rate of pension decreases at a much faster rate than it did before. Put another way, for every $1000 of assets an older Australian has over the cut off, the age pension reduces by $78 per year. It used to be $39. This means that $1000 needs to earn you 7.8% to make up for the lost income.
For those going into care, the choice is much more interesting - in that the situation is reversed.
In some cases, where there is a choice between a room with a lower RAD compared to a higher RAD, the increase in Age Pension based on the the change of assessable assets can make a more expensive room better in terms of the overall financial outcome.
That’s right - pay a higher RAD, reduce assets assessable for the Centrelink Age Pension, and the amount of Age Pension increase can improve the financial position of the resident.
This is a very good reason to have a clear view on choices. The story around room affordability has changed.
Keep the home, yes. Rent it out..nah
Here is another interesting situation. A resident moves into an aged care bed with a low RAD that is easily covered by savings. As a result, the resident had a small uplift in the Age Pension. Meanwhile the overall benefit of renting out the house (taking into account the reduction in the age pension and the increase in means tested aged care costs) was low enough that the family was really in no hurry at all to get the house ready for rent.
Meanwhile, selling the house had such an adverse impact on means testing that keeping the house (even empty) made more sense.
Renting the house out was still the best financial outcome in this instance. But not by much. However, keeping the house was a no-brainer (at least for the 2 years the asset remains exempt from means testing).
However, things are different on the frontier
The challenge with renting out the former home is to balance the benefit of the rental income with the adverse impact it has on the means test for the age pension and care costs. For many cases, the value that is held in the property is put to far better use in paying down the Refundable Accommodation Deposit (RAD). This is because an unpaid RAD will cost the resident in a daily payment that works like an expensive loan.
However, for a resident with assets that take them to the margin of means testing thresholds, the rental income can help the overall cashflow situation without adversely affecting other means tested outcomes - mainly because they are already “maxed out”.
So renting out the former home is still a good idea for some. Make sure you have the right information.
No interest in interest - Except for Daily Accommodation Payments
Getting interest from cash at the bank is a tiny part of the story right now. A reasonable expectation is that money in the bank may get you interest at about 2%. Meanwhile, unpaid RAD’s will cost you 5.76% as a Daily Accommodation Payment. That’s a big difference.
Keeping money in the bank when there is a RAD to be paid is not done for income. It's to fund and shortfalls as they arise. The best way to know how much to keep aside, is to understand what the overall cashflow is going to look like.
It's still complicated
The choice between keeping the house, selling the house and how you pay for your care is still complicated, and in 2017 the dynamics have changed in an interesting way, due to the changes to the Centrelink Age Pension, and the challenge of low interest rates.
As usual, an informed decision will come from some expert advice. We can help.