In Australia we have a housing crisis and an aged care crisis and the two are, at least in part, connected.
You see, the Australian love affair with home ownership is more than a want or desire it is basically enshrined in legislation.
Home owners moving into aged care can continue their pension home exemption for two years after they move out.
For couples, the two years starts when the last person leaves.
The home's special treatment extends beyond the pension to the aged care means test where it is an exempt asset while a protected person lives there (this includes a spouse or dependent child and in some cases a carer or close relative).
When the home is assessed, the market value is included up to a capped value of $201,231.
Let's look at what these rules mean.
Shirley has a home worth $2 million, $250,000 of investments and $10,000 in personal assets. She receives the full age pension of $29,024 per year and $10,000 of earnings from her investments.
If she keeps her home Shirley will continue to receive the age pension of $29,024/year for the next two years and will pay $8 per day towards her care through a means tested care fee.
In two years' time when her home exemption ends her pension will reduce to $0, however for aged care her home will still be assessed at $201,231 and her means tested care fee will remain at $8 per day.
If we compare that to selling her home, Shirley's pension would be lost and her means tested care fee would be $128 per day until she reaches the annual cap of $33,309 and in two-and-a-half years the lifetime limit of $79,942.
If Shirley lives in aged care for two years the benefit of keeping her home is $119,556.
The legislation doesn't just encourage those moving into residential aged care to keep their home, those receiving home care are also incentivised to stay in the family home rather than downsize into more age-friendly housing such as a retirement village, land lease community or granny flat where the accommodation is purpose built.
The financial barrier for many downsizers is the reduction of their age pension, a source of income for two-thirds of retirees.
For some, there can be a double whammy - the reduction (or loss) of their pension can come with an increase to their home care package fees.
Under the pension assets test home owners have the value of their home exempt, while assets such as bank accounts, term deposits, shares, cars and contents are assessed at the market value.
Once the assets exceed the asset threshold of $301,750 for singles and $451,500 for couples the age pension reduces by $7800 per year for every $100,000 of assets. Many people considering downsizing realise that a smaller home also means a smaller (or no) pension.
Let's look at an example.
Fred is a pensioner receiving $1062 per fortnight, his house is worth $1 million, he has $300,000 in investments and $20,000 of personal assets.
He receives a level three home care package.
If Fred stays in the family home, he will continue to receive $27,600 per year in age pension, he will pay $12 per day as a basic daily fee towards his home care package.
Fred's home care package will provide him with $43,844 per year and he can use some of this funding to make modifications to his home.
If Fred downsizes, paying $700,000 for his new home, his pension will drop to $162 per fortnight ($4200/year).
If the extra $300,000 in investments from the sale of his home earn 4 per cent then he won't be able to replace the pension he has lost ($23,400/year).
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In fact, he would need a return of almost 8 per cent per annum to replace his lost pension. From a home care package point of view, the cost to Fred would be the same but because his new home wouldn't need to be modified Fred could spend more of his home care package on care.
Instead of bemoaning Australian's love of property, we need to recognise that it makes financial sense.
If we want people to downsize into age friendly accommodation to spend home care package funds on care and to sell their home when they move into aged care, then we need to create incentives for people to do it. The current policy settings are incentivising people to do the opposite.
- Rachel Lane has specialised in retirement living and aged care for 20 years, she is the principal of Aged Care Gurus and the co-author of Downsizing Made Simple.
