Pensioners may be forced to sell Sydney homes as government tightens means testing
Although the new rule are proposed to only take effect early next year, we can’t help but worry about the possible implications it may bring to retirees entering residential aged care. Starting 1 January 2016, rental income will no longer be exempted from means testing of age care facility fees. This may result in more retirees opting to sell their home instead or of keeping there home and renting it out with the help of a reverse mortgage to support their cash flow requirements. According to the government, this will achieve a budget saving of $26.2 million over five years.
If you are entering the residential aged care after 1 January 2016, it is most likely that you won’t notice the change in policy. The new rule won’t affect the services aged care facility’s provide so it probably won’t have much impact on residents’ decision to pay for aged care through a Daily Accommodation Payments (DAP) or Refundable Accommodation Deposits (RAD). People with limited knowledge about the aged care system will hardly feel the change in policy as they only seek options when the need arises.
The removal of the rental income exemption in aged care means testing will start on 1 January 2016. Although rental income will remain exempt from the age pension income test if the payment of accommodation costs are structured correctly, people entering aged care after 1 January 2016 will have to think closely about their position because their age care means tested fees may be higher if they rent their former home. The new rule may mean is it more difficult to avoid selling the family home.
Current rule vs. new rule
If you are wondering how this change may affect you, let us provide this example:
Emily is a widower on a full pension. Apart from the pension she also receives $400 per week net rental income after expenses from her former home. She also has $2,000 cash and around $60,000 savings in the bank. She pays the interest costs on the full $400,000 accommodation payment via a Daily Accommodation Payment (DAP) instead of a lump sum Refundable Accommodation Deposit (RAD).
Under the current rule (from 1 July 2015), Emily pays the basic daily fee of $47.49, the Daily Accommodation Payment (DAP) of $67.40 and a means tested care fee of $1.70 per day. Given her present circumstances and the aged care fees she has to pay, Emily will have a cash flow surplus of $1,896 at the end of the year excluding her annual living expenses.
On the other hand, if Emily enters residential aged care after 1 January 2016, her rental income of $400 per week will not be exempted in the mean testing. Effectively, she now has to pay a mean tested care fee of $13.98 a day, as opposed to $1.70 under the old rule. This is an additional fee of $4,483 per annum on top of the $42,555 per annum in age care costs she would have paid under the current rules. Emily will have a cash flow deficit of $2,587 at the end of the year excluding her annual living expenses.
Avoid costly mistakes!
If you or a loved one are soon to enter aged care and you are torn between selling your home, leasing it, or applying for a reverse mortgage to fund your aged care fees, we can help you plan and give you freedom of choice. The new rule on means testing will could increase home sale activity; Sydney Aged Care Financial Advisers can give you insight into your situation and assist you in making informed decisions.
Call us for a free initial consultation on 1300 659 677.