A couple of weeks ago my colleague, Peter Kelly (PK), posted a blog titled A super budgetwhich provided a very comprehensive overview of the 2016 Federal Budget, and outlined the changes in relation to superannuation.
If you haven’t read it yet I highly recommend that you take the time and do so immediately –as this post provides a large amount of very useful information.
For age pensioners the budget could be described as a non-event – which is actually great news!
However – there was one very important legislative change proposed which did not get a lot of publicity.
The Mid-Year Economic and Financial Outlook document (released in December 2015) did provide some warning regarding this possible change.
The proposal is to remove the current exemption under the pension’s assets and income test of the value of a person’s home, and the rent received when they do enter an aged care facility, effective from 1 January 2017.
At the beginning of this year this ‘rental exemption’ was removed during the assessment of a person’s aged care fees.
But, that sounds complicated. Let me elaborate further…
If an individual needs to enter residential aged care and, upon entry, are required to pay a daily accommodation payment (or a contribution on top of the basic daily fee) – if they own their home there is a strategy to help pay this accommodation payment. This has proven to be an attractive option for many people known as ‘retain your home and rent it out’.
Under the social security legislation, both the value of the home and the rental income were exempt from the assets and income test when assessing someone’s entitlement to an age pension.
The budget proposal would remove this exemption for residents who enter aged care facilities after 1 January 2017.
In addition to this proposed change, and what we do know for certain, is that the test used to assess someone’s pension entitlement will change substantially after 1 January 2017.
The combination of both the proposed change, and the almost certain asset test change, could be quite dramatic.
In the worst case scenario an individual living in their own home (worth $700,000 and with $50,000 in the bank) who move into residential aged care after 1 January 2017, and rent their home to cover their fees, could lose their age pension entitlement as a result of this change.
I should reiterate that what is detailed above is the worst case scenario and, until we know all of the details about the proposed changes, no one should rush out and make any dramatic decisions – certainly not without talking to an expert.
I do understand the need for the government to encourage people to use their assets to fund both their retirement and their aged care costs, but the removal of the rental exemption for age pension assessment purposes will leave a large number of age pensioners (or their children) faced with a financial dilemma.
“Do I sell my home or do I keep it and mortgage the property to pay my future living costs? And how quickly do I need to make this decision?”.
As I am sure a number of you would understand – selling a home when somebody has to enter a residential aged care facility can be quite stressful.
These two pieces of legislation when combined, I believe, have a far greater effect on someone’s lifestyle choices in latter retirement than a cap on contributions, or limiting a pension account to $1.6 million dollars.
I do hope that when the details of the proposed legislation are released there is a period of time which allows a person to talk to an expert.
Hopefully we will be able to fully understand the ramification of any decision they are required to make before they find their age pension reduced, or even worse, lost altogether.