Is the ‘retain and rent’ strategy redundant?
One of the big decisions to be made when moving in to aged care is whether to sell or retain the family home. This decision will have both financial and emotional impacts.
On an emotional level, there may be a strong attachment to the home, making the decision to sell very confronting and difficult.
On the financial side, the decision may impact the Age Pension entitlement, as well as the amount of the daily care fees which a person entering aged care will pay.
The rules for how the former home are assessed are different for aged care calculations than for means-testing for Centrelink or DVA Age Pensions. This information pertains to the rental income as it impacts the Age Pension entitlement.
Rules around the treatment of the former family home in determining Age Pension entitlement changed at the beginning of this year. The changes apply to those homeowners who rent their former family home in order to enter aged care on or after 1 January 2017.
While each situation needs to be assessed on a case-by-case basis, the changes will generally lower the amount of Age Pension paid to homeowners renting their former home to enter residential aged care.
This means that in many circumstances, the “retain and rent” strategy – of holding onto an income-generating asset while maximising Centrelink / Department of Veterans Affairs (DVA) Age Pensions – may no longer be attractive.
What has changed?
In addition to the basic eligibility rules (age and residence status), Centrelink applies two tests when determining entitlements to the Age Pension: the income test and the assets test.
If you’re over the income and assets limits set down by the Government, you receive a lower pension, or in some cases, no pension.
Prior to 1 January 2017, a homeowner who entered aged care and was making a Daily Accommodation Payment (DAP) was able to retain and rent their former family home without the net rental income being counted when applying the income test.
Removal of the exemption means that Centrelink or DVA will now count net rental income when applying the income test.
Each dollar of assessable income over the income free limit will reduce Age Pension entitlement by 50c in the dollar.
The changes do not impact the way which the former family home is treated when applying the assets test.
Upon entering aged care, the former family home will remain exempt from the assets test for two years.
Once this two-year period lapses, the value of the former home will be counted as an asset and it could affect your entitlement to the Age Pension.
Is there any merit in the ‘retain and rent’ strategy?
Clearly these changes will now have people contemplating aged care questioning whether there is any benefit in the ‘retain and rent’ strategy.
Unfortunately, there’s no simple answer to this question.
Although the new rules will likely mean a reduction to the Age Pension entitlement for a homeowner who has entered aged care, there will invariably be a number of other considerations to be given before making a decision.
Questions to be asked may include the following:
o Is the rental income sufficient to offset the reduction in the Age Pension entitlement?
o Would the homeowner be better served by selling the home and using the proceeds to fund some or all of the Refundable Accommodation Payment (RAD).
o How does the change in Age Pension entitlement affect the Means Tested Fee payable towards the cost of care upon entering aged care?
In the end, the decision will depend largely on the assessed value of your home, your accommodation costs, your savings, income and assets
Every situation is different, and there is no one best course of action.
It’s important to speak to a trusted advisor before making your final decision.
For peace of mind, or assistance with your aged care journey, contact a McEwen Investment Services adviser on 1300 623 936