Starting next year, a new rule in aged care means-testing is expected to force an increase in house sales and reverse mortgage applications among pensioners. Beginning January 1, rental income will no longer be excluded in the means test calculation. The present set of rules allow residents to enjoy their rental income and to use it directly to pay aged care fees. Many aged care financial experts believe that this tightening of the mean test will limit pensioners’ options in affording aged care fees.
If you enter residential aged care before the year ends you will fortunately be subjected to the current rule, where rental income is exempt in the mean test. If you enter care after January 1 the new rule will negatively affect your cash position or at worst, force you to sell your family home or apply for a reverse mortgage.
So how exactly does this change affect you? Well, let’s say you are a full pensioner that receives $22,365 pension a year and has $60,000 savings in the bank. You are receiving $18,000 in rental income a year and this is what you use to pay for your daily accommodation. Under the current rule, your daily care fees will be around $17,936 per year. Under the new rule they will increase to around $25,491 a year.
Selling your home or taking out a reverse mortgage can seem like a more viable option. But of course where possible, people would always prefer to keep their family home while in residential aged care. Having the freedom to choose other options in times like these is invaluable. In this light the announcement about the change in means testing is disappointing. There are many aged care activists who have questioned the policy and don’t think it is fair.
The Social Security Act 1991 allows residents of aged care to rent out their home and use their rental income to pay for aged care fees. Effectively, this source of income has been exempted in the calculation of the means-tested care fee. That was the original regime but as described above, beginning next year, this new rule is likely to change the way new aged care residents deal with their family home.
The recent announcement came as a surprise as we expected the Living Longer Living Better reforms to protect Australians and support them in attempting to retain the family home. This change makes us more vigilant in educating families who are about to avail themselves of aged care services. Knowing and understanding your financial options will avoid costly mistakes and will save you a lot of money in the long run.
Is your home worth keeping? Do you want to rent it out? Would a reverse mortgage be enough to cover your aged care fees? We will be glad to sit down with you and answer your questions.
For a free initial consultation please call us on (07) 3229 0023.
Andrew Tynan Financial Planning Pty Ltd ABN 43 113 607 739, trading as Brisbane Aged Care Financial Advisers is an authorised representative of Charter Financial Planning Limited (ABN 35 002 976 294), Australian Financial Services Licensee.