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The big decisions around choosing to go into aged care are always difficult and emotional for everyone concerned. From the start of 2017, they are likely to get even more complex, with both the Age Pension set for another shake-up.
The situation at the moment means many people entering aged care choose to keep their family home and rent it out to help with their accommodation payments. This strategy can be attractive, as your family home and any rental income is exempt from assessment for the Age Pension. But this could change from 1 January 2017.
Changes to aged care fees
The government continues tightening the rules around the calculation of means-tested fees for residential aged care.
In 2014, both your assets and income were considered when calculating your aged care fee. But if you retained your family home and chose to rent it out, the rental income was not counted towards your assessed income if you paid for some of your aged care costs with the income.
Early 2016, this rule changed, so when you entered aged care any rental income you received from your family home was included in your assessed income. Paying for your aged care costs using a periodic payment no longer had an advantage compared to paying via a lump sum. Consequently, many new residents at aged care facilities now faced higher fees.
Although these changes have affected aged care fees for new residents, they had no impact on the treatment of a family home when working out eligibility for the Age Pension. But stand by, as that now looks set to change.
Family home to be assessable for Age Pension
Currently, your family home is excluded from the Age Pension asset test for two years if you enter aged care. An indefinite exemption is available if your home is rented and you pay your accommodation costs with a periodic payment. In this situation, neither your family home nor the rental income is counted under the Age Pension asset or income tests.
If the government has its way, this will change from 1 January 2017, as it proposes to change the means-tested treatment of a family home for both aged care and the Age Pension.
What this means for new entrants into aged care facilities is that the net rental income from your family home (where you decide to pay your accommodation costs with a daily payment rather than a lump sum), will now be counted towards the Age Pension income test.
So do you sell your family home?
The proposed changes mean the decision about whether to keep your family home and rent it out will become more complicated. Under the old rules, there were benefits in keeping your home, enjoying a boost to your income from any rental payments and making periodic payments. Now the decision won’t be as straightforward.
Retaining your family home may still be worthwhile, but new aged care residents will need to carefully work out whether the benefit from their rental income outweighs the potential loss of some of their Age Pension.
Facing tougher asset test rules
Then just to complicate matters, the proposed new rules are planned to come into force at the same time as separate changes affecting the assets test thresholds used to calculate pension entitlements. Although limits for the Age Pension asset test are increasing from 1 January 2017, the rate at which pensions are reduced once you exceed the threshold is also increasing. Some pensioners may have their pension payments reduced or cancelled altogether!
Both changes are likely to have an adverse impact on the Age Pension entitlement of some people entering aged care who wish to retain their family home. So before you make any binding decisions be sure to carefully weigh up all your options.