How to make the most of your super when paying for residential aged care

Strategic planning and good advice can help make the most of super and welfare benefits

 

by Louise Biti      9 Aug 2018   Australian Financial Review

Residential aged care would be an expensive proposition if the government did not subsidise the cost of care. In 2016-17, the average subsidy paid by the government was $49,724 per resident.

Residents generally pay for accommodation plus basic living expenses ($50.16 per day). They are also asked to contribute towards the cost of care in accordance with their affordability, as measured by the means-test amount (MTA) calculation. This is a complex formula that adds together a portion of assessable assets and assessable income to calculate a daily affordability amount.

Most people will have money held in a self managed super fund – or or other superannuation funds – included in the MTA calculation. The assessment rules depend on the person’s age and the form in which the savings are held. The same rules apply when calculating age pension (or other means-tested) entitlements.

These assessment rules create some strategic opportunities which may help to reduce the cost of care and/or increase age pension entitlements. The accompanying table sets out guidelines.

Where one spouse is younger (under age pension age)

Transferring money into a younger spouse’s name (in accumulation phase) may help to reduce the impact on aged care fees if that person is under age pension age.  This could be achieved by:

·         Using non-superannuation savings to make contributions into superannuation

·         Withdrawing from the older spouse’s superannuation to fund superannuation contributions for the younger spouse

·         Commuting an account-based pension commenced by the younger spouse and rolling back to accumulation phase.

These options transfer money from an assessable investment into an exempt investment, but the full financial circumstances should be reviewed to check whether the outcome is beneficial.

Example:

Joe, 68, has early onset dementia and is moving into residential care. His wife, Mary,  62, is under age pension age. Mary works part-time and earns $22,000 per annum.

Joe and Mary are members of a SMSF with $870,000 in an account-based pension in Joe’s name and $250,000 in accumulation phase in Mary’s name. They also have $70,00 in cash and car/contents at a disposal market value of $20,000. His room in aged care will cost $600,000.

When Joe moves into aged care he qualifies for a small age pension of $1,305 per annum. His care fees will commence at:

·         Daily accommodation payment for room – $97.97

·         Basic daily care fee – $50.16

·         Means-tested care fee – $10.88

·         Total fees – $159.01 per day ($58,039 per annum)

Joe receives advice to cash $300,000 from his account-based pension so Mary can use the bring-forward rules to make a non-concessional contribution into her account. This reduces assessable assets and income (while she is under age pension age). This increases his age pension to $12,970 per annum, but his aged care fees will increase slightly to:

·         Daily accommodation payment for room – $97.97

·         Basic daily care fee – $50.16

·         Means-tested care fee – $13.02

·         Total fees – $161.15 per day ($58,820 per annum)

The MTA calculation is impacted by both income and assets. The higher age pension increases the overall calculation despite the reduction in assessable assets. The impact is not the same for every client, so a personal assessment is always required. The additional age pension does make Joe and Mary better off overall.

Paying for accommodation

Joe could improve his situation further by cashing out the rest of his account-based pension plus some of the cash in the bank to pay the full refundable accommodation deposit (RAD) for his room. The RAD is an exempt asset for age pension purposes and is repaid when he leaves. It is not exempt for the MTA calculation but does not generate assessable income. His age pension increases to $19,899 per annum and the total aged care fees reduce to $59.77 per day ($21,814 per annum).

Estate planning

Joe is still married, so any money remaining in the SMSF in his name can be paid to Mary tax-free. If his starting balance of $870,000 was all taxable component and he did not have a tax dependant, his death benefit would include a tax liability of $130,500 plus Medicare.

Clients who are living in residential care may wish to consider cashing out superannuation while they can access the money tax-free to avoid death benefits tax if they do not have tax dependants. This takes the money outside superannuation and back into the estate upon death so for some clients, this may not be the best option.

 

Seeking advice

Superannuation, taxation, estate planning, fee calculations and age pension are each complex sets of rules and are intertwined for clients moving into residential aged care. And for older clients once superannuation is cashed out, the opportunity to get it back in could be lost.

Before making decisions, financial advice from an adviser accredited in age care is vital to ensure the full situation is considered.

Louise Biti is director of Aged Care Steps

Disclaimer: The information in this article is general and does not take into account your particular circumstances. We recommend specific financial tax or legal advice be sought before any action is taken to apply the rules to your specific circumstances.  Current as at 1 August 2018.

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