With Australia’s aging population, aged care is becoming an issue for a growing number of families. For a wide range of reasons, including cost, human vulnerability, the incidence of dementia, and the possibility for family disputes, this can be a subject fraught with emotion. We want to be able to help ease that burden.
While old age and the potential need for aged care accommodation is predictable, people often find it difficult to plan for. We often don’t think about aged care until the need for it emerges suddenly through illness, incapacity, injury or the death of a partner.
How your adviser can help
When it comes to aged care, your adviser can help with the following:
- Understanding the situation and the funding required (including ‘entry’ fees like a Refundable Accommodation Deposit and ongoing fees like Daily Accommodation Payments and Contributions)
- Minimising costs and fees
- Retaining or maximising social security entitlements
- Dealing with the family home (whether to keep it, rent it out, or sell it)
- Investment advice
- Cashflow management
- Estate planning.
Much of the work in aged care planning is about integrating it with an overall financial plan. For most people, the primary goal is to maximise access to aged care at minimum cost. But other issues – such as the disposal of property, ‘Bank of Mum and Dad’ gifts and loans, tax, estate planning – can make the process more complicated.
Social security opportunities
Modern products, like lifetime income stream accounts, offer you some strategic flexibility when it comes to navigating challenges. Only 60% of the purchase price is assessed under the age pension assets test, and that discount can grow to 100% with time and planning. Plus, there’s no income test on deferred lifetime income streams. These advantages can allow an adviser to gain more Social Security income for you.
Jackie’s story – an aged care income boost1
Let’s take a look at how a lifetime income stream can help boost your income in aged care with the help of a financial adviser.
Jackie, 78, is a homeowner, receives the full age pension and has $10,000 in the bank. Due to deteriorating health, she’ll soon move into an aged care facility, with a Refundable Accommodation Deposit (RAD) of $500,000.
To fund the RAD she sells her home for $1,200,000. Let’s see how Jackie’s net cash flow changes if she invests $200,000 of the proceeds in a lifetime income stream (non-super).
We’ve assumed in both scenarios Jackie makes a downsizer contribution of $300,000 to super and takes out an ABP (drawing down the minimum). She invests her remaining funds outside super.
Home sold, proceeds used to pay $500,000 RAD, $300,000 in an ABP, $400,000 in personal investment portfolio, retain $10,000 in cash | Home sold, proceeds used to pay $500,000 RAD, $300,000 in an ABP, invest $200,000 in a lifetime income stream, $200,000 in a personal investment portfolio, retain $10,000 in cash | ||
| Income | Age pension | $14,697 | $20,816 |
| Account based pension (minimum drawdown) | $18,000 | $18,000 | |
| Investment income | $20,000 | $10,000 | |
| Annuity income | Nil | $14,557 | |
| Expenses | Basic daily fee | $21,528 | $21,528 |
| Means-tested care fee (MTCF)1 | $17,659 | $18,345 | |
| Net cash flow | $13,510 per annum | $23,500 per annum | |
By investing part of her home sale proceeds in a lifetime income stream, Jackie and her adviser reduce the amount assessable for the income and assets tests, increasing her age pension entitlement.
While that extra income does increase the Means-Tested Care Fee1 by $686 a year, this is more than offset by the extra age pension of $6,119 in the first year. When she reaches 84, the further reduction in Centrelink accessibility (from 60% to 30%) may further increase Jackie’s age pension entitlement and create a cost savings on the Means-Tested Care Fee.
Results can vary due to a range of factors, including life expectancy, investment returns, RAD costs and more. Your adviser will consider your circumstances when considering the value of lifetime income streams and helping you plan for aged care.
Current as at Dec 2023
1 Numbers in this case study reflect age pension rates, thresholds and aged care fees as at 1 July 2023.
