The family home and age pension

If an individual enters a hostel or nursing home, the decision to sell or keep their home can affect how much age pension they receive, their aged care entry costs and the daily care fees they will pay. Overall, this impacts their total net income.

When entering a hostel (low-level care), residents may pay a basic daily fee, an income-tested fee and an accommodation bond. When entering a nursing home (high-level care), residents may pay a basic daily fee, an income-tested fee and an accommodation charge (daily).

Impact on age pension

The age pension entitlement is determined by applying both an income test and an assets test. Both tests are applied in the event of a claim for benefits and the test that provides the lower rate of pension will apply.

Assets test

The former home is exempt from the age pension assets test for two years after entry to an aged care facility, and indefinitely in certain circumstances. After two years, the home may be assessed under the assets test and the higher non-homeowner assets test limits will apply. The home will remain exempt indefinitely where:

• the individual’s spouse lives in the home; or
• the home is rented and some or all of the accommodation bond (hostel) is paid by periodic payment; or
• the home is rented and the individual pays an accommodation charge (nursing home).

If the home is sold, the proceeds may be assessed depending on how they are used. However, assessment is against the higher non-homeowner limit.

Income test

Where part or all of an accommodation bond is paid as periodic payments or an accommodation charge applies, any income received from rental of the home is exempt for the income test.

If the home is sold, the income test assessment depends on how the proceeds are used. The three broad investment categories are treated as follows:

• financial investments (bank account, shares, unit trusts, etc) that are deemed to receive a specified rate of return are assessed;
• investment property — the taxable income is assessed; and
• income streams — the income received less a portion that is considered to be a return of capital is assessed.

Keeping the home may help to reduce assessable assets and income. This may boost total income and keep costs lower compared to selling the home. However, factors such as home maintenance expenses and the expected net returns for each investment option should be considered.

Table 1 summarises options for the home and how they impact the age pension.

Impact on aged care entry costs

Table 2 summarises options for the home and how they affect entry costs for nursing homes and hostels.

Impact on aged care daily care fees

Daily care fees comprise a basic daily care fee and a daily income-tested fee.

All hostel and nursing home residents must pay the basic daily care fee, but there are variations in the amount depending on personal circumstances and, in particular, assessable income.

Residents may be subject to a daily income-tested fee depending on how much income they receive. Income includes Centrelink/DVA assessed income plus the amount of any Centrelink/DVA pension received.

An income-tested fee applies if assessable income is more than $783.70 per fortnight for a single person or $1,531.40 per fortnight combined for a couple (to December 31, 2009).

Residents who receive the full age pension are not required to pay an income-tested fee.

The decision to sell or keep the home can have an impact on daily care fees. For example, if a resident keeps their home, rents it out and pays some or their entire accommodation bond by periodic payment or pays an accommodation charge, the rental income is not used in the calculation of the income-tested daily care fee.

Case study

Nancy is a 72-year old widow who is moving into a hostel. She has been asked to pay an accommodation bond of $135,000.

Her assets are outlined in table 3.

Nancy does not have enough money to pay the bond without selling her home, so she is considering her options and deciding what to do with her home.

• Option 1 — Nancy pays $120,000 of the accommodation bond as a lump sum and the remaining $15,000 as periodic payments. The interest rate payable on the periodic payments is 7.30 per cent (rate current to December 31, 2009). This leaves no money in her bank account and she rents her home for $20,800 per annum.
• Option 2 — Nancy sells her home to pay the full $135,000 bond as a lump sum and invests the rest of the money in her bank account.

Table 4 shows the two options and the impact each has on Nancy’s aged care fees and age pension.

Assumptions:

• home is rented for $20,800 per annum. Expenses are not included;
• capital growth on home is not included;
• bank account earns 6.0 per cent per annum interest;
• assessable income on bank account is calculated using deeming rates current as at September 20, 2009 — first $42,000 at 2 per cent and the balance at 3 per cent; and
• age pension rates and thresholds are current to December 31, 2009. Pension supplement is included.

In this example, the option for Nancy to sell the home results in higher net income than the option to keep the home, rent it out and pay some of the bond by periodic payment. However, lost potential capital growth should also be taken into consideration.

Conclusion

Decisions about how clients pay for their accommodation in aged care facilities, whether the former home is sold or kept, and what is done with other assets can have a significant impact on their financial position and should be considered carefully.