aged care advisor

Aged Care Advice

Your Home, To Sell Or Not To Sell?

One of the biggest decisions to make when calculating the costs of aged care, is whether or not to keep the family home. In light of the changes on January 1, 2016 to the treatment of rental income for new aged care residents, it may be worth seeking specialist aged care advice as what you thought would be a balanced aged care financial plan may no longer be the most beneficial option.

aged care advisorUnder previous legislation, which applies to those who entered aged care prior to January 1, 2016, income generated from your former home, where it was retained and rented out in order to help pay the daily accommodation payment (DAP), was exempt from income calculations.

However for new aged care residents, the change means that any rental income from their former home will now be treated as part of their income for the purpose of calculating their means tested care fee.

At no point was it going to be easy to decide what to do with the family home, however under previous legislation, keeping the family home was potentially an easier decision to make, not only because of the emotional reassurance of knowing that the house was always there to go back to but because it made sound financial sense.

The median value of Brisbane homes has just reached an historic high of $600 000, with prestige housing and those located in inner suburbs firing even higher. This combined with affordability concerns around Aged Care fees makes the “best path to take” even more unclear for many people looking to transition into aged care.

This then poses a very interesting and potentially complex question – for those who are considering the transition into aged care, is part paying the refundable accommodation deposit (RAD) and renting out your family home still a beneficial option?

There’s a good chance that the answer is yes.

Let’s look at some examples.

 

Edna is an 85 year old widow. Due to deteriorating health, exacerbated by an unexpected fall, Edna and her family decide that she would do better in a residential aged care facility. She has $135 000 in cash / term deposits, $5 000 in personal effects and she is surprised when the valuation of her property comes back at $1 million. In addition to this, Edna receives the full age pension entitlement.

After the completion of an aged care assessment team (ACAT), Edna selects her preferred facility, which has a RAD of $350 000.

For many, the immediate reaction would be to put the house on the market in order to pay the entire RAD ($350 000). However, Edna seeks advice from a Financial Planner who specialises in Aged Care.  The planner poses another option which is to keep and rent the home and pay part of the RAD.  The following table shows Edna’s financial position under both options.

Aged Care Advice

 

These options have different outcomes for both Aged Care fee purposes and Age Pension entitlement purposes and will affect Edna’s cash flow.  The following table shows Edna’s cash flow under both options.

Aged Care Advice

 

After Edna’s adviser explains both options, Edna decides to keep and rent her home given that it will place her in a positive cash flow position.  This is due to several key reasons:

  • The Age Pension will be affected following the sale of the home as the balance of the funds, after paying the RAD, will be held in cash which will be deemed for Age Pension assessment. Edna is able to retain the full pension if she keeps and rents the home as both the home value and rental income remains exempt from Age Pension assessment while Edna continues to pay a DAP.
  • Following the sale of the home, the balance of funds are invested in cash and term deposits, assumed to be earning 2{1c85e07e6a5946d5141f8d71945f8781c216c68b68724489820cf486f1e72b7e} ($15,800) compared to the rental income ($31,200 net of costs) providing a higher income yield.
  • Following the sale of the home all assets are used to assess the means tested care fee. By keeping and renting the home, the value of the home is capped at $157,987.20 and the means tested care is reduced even though rental income is used to assess the means tested care fee.

Although keeping and renting the home has put Edna in a cash flow positive position there are risks to consider before Edna proceeds with this strategy which she discusses with her Financial Adviser.

 

As you can see, the recent changes to rental income for Aged Care fee purposes has not affected Edna’s ability to fund care.  However, it is important that you seek advice prior to making any decisions.

The above information in relation to Edna is fictional for illustration purposes only and should not be considered financial advice.

For more information or for aged care financial advice that’s tailored to your needs, why not complete the contact form below and let Beacon Aged Care and Retirement Advisers provide you with clear, valuable aged care advice that can help you make informed decisions for you and your loved ones.