The Australian population is ageing, with those aged 65 years and over making up a growing proportion of the total population. What’s more, this proportion is projected to grow over the coming decades.

That’s why as both a nation and as individuals, it’s prudent to look at ways we can help reduce aged care fees, increase the pension and/or provide necessary cash flow for older Australians.

In this article, we present some tips and strategies individuals can adopt to help minimise income and assets for Centrelink’s means testing. These strategies may help retain or even increase an individual’s age pension, as well as reducing means tested care fees for clients.

Firstly, there are certain investments that receive concessional Centrelink treatment, including:

  • Superannuation in accumulation phase held by a person that’s under the pension age
  • Pre-paid funeral expenses (no limit)
  • Exempt funeral bonds $13,250 each (not joint)
  • Burial plot
  • Gifting up to $10,000 per financial year (max. $30,000 over a 5-year rolling period)
  • Long term and lifetime annuities that are assessed at reducing capital values with only a portion of income being assessed for social security means tests
  • Insurance bond held in a trust

There are also strategies to increase cash flow when entering an aged care facility, including:

  • Retaining the home
  • Reversing the mortgage (Pension Loan Scheme)
  • Paying RAD (Refundable Accommodation Deposit)
  • Loan secured against assessable assets
  • Couple ‘living separately and apart’
  • Financial hardship
  • Special Disability Trust
  • Aged care annuity

Let’s take a look at some of these strategies in more detail…

Retaining the home

The family home is exempt from the Centrelink assets test for up to two years where the resident leaves the home to enter a care situation e.g. permanent residential aged care. This exemption may help in retaining the age pension.

For aged care purposes, the home’s value is assessed up to the home exemption cap ($169,079.20 as at 20 September 2019). However, 100% exemption applies when a protected person lives in the home. In both cases, the home is treated concessionally for the calculation of the means tested amount, which determines whether the person is ‘low means’ when entering residential aged care and any means tested care fee the person pays.

If the home is sold, the sale proceeds are assessed for Centrelink/DVA and aged care means tests. Renting the home can provide additional cash flow, however it may reduce the age pension Centrelink/DVA and increase the means tested care fee.

After the two year exemption period, the home is assessed as a Centrelink asset and the resident may lose their age pension. However for aged care purposes, the value of the former home continues to be capped at the home exemption cap.

Reversing the mortgage

If the home is retained, a reverse mortgage such as the Pension Loan Scheme (PLS) may provide additional cashflow to meet expenses. The PLS is a reverse mortgage offered by the Government that requires Australian real estate as security, and involves a regular fortnightly draw down up to 150% of the person’s maximum age pension.

If a person receives an age pension, the PLS ‘tops up’ the pension so that the total of the age pension and PLS is (up to) 150% of the maximum age pension applicable to that person e.g. single, couple or illness separated rate.

Paying RAD

The Refundable Accommodation Deposit (RAD) is a Centrelink exempt asset that can help retain or increase social security entitlements (if any), and reduce the means tested amount.

While the RAD is an assessable aged care asset, no income is assessed for the income test. Paying the RAD means no Daily Accommodation Payment (DAP).

Loan secured against assessable assets

Loans secured against assets assessable for aged care may reduce the value of assessable aged care assets e.g. real property or investments. However, this does not apply to a RAD.

This strategy involves formalisation of loan contracts fees, therefore it’s important to consider cost vs benefit, as well as any legal ramifications, before implementing.

Couple living separately and apart

When one partner of a couple enters residential aged care, the couple is treated as illness separated, with each partner attributed 50% of combined assets. The single income and assets means test apply to those treated as living separately and apart.

A couple may apply to be treated as living separately and apart if they can prove that the partner in aged care:

  • Has a serious, incapacitating condition that is permanent in nature (e.g. Huntington’s disease or advanced Alzheimer’s disease); and
  • Is totally and permanently incapable of providing their partner with companionship, comfort, or physical/intellectual/emotional support because they no longer recognise their partner and are incapable of being in a relationship physically, mentally and emotionally.

Financial hardship

A Home Care Package (HCP) or residential aged care recipient or their approved care provider may apply for a financial hardship determination for the recipient.

A financial hardship determination cannot be approved where the care recipient:

  • Has not provided information about their income (SA456 form for HCP recipients) and assets or income assessment (SA457 form for residential aged care residents)
  • Has assets, excluding unrealisable assets, of more than 1.5 times the annual total of the basic age pension amount, the pension supplement amount and the clean energy supplement amount ($36,402.60 as at 20 September 2019)
  • Has gifted more than $10,000 over the last 12 months or $30,000 over the last five years

Unrealisable assets are those a person cannot sell or use as security for borrowing, including:

  • Jointly owned property
  • Property that has been on the market for at least 6 months
  • Gifts where the decision to gift was made when the person was incapacitated or was made by the power of attorney
  • Frozen assets

The Secretary will also consider whether the care recipient:

  • Has income, after essential expenses, that’s less than 15% of the basic age pension amount, their financial situation, and any income from Centrelink/DVA and other sources
  • Has taken action to access Centrelink/DVA pension, benefits or other income support payments, Centrelink/DVA financial hardship assistance, the pension loans scheme or income from any other source
  • Has income that he or she cannot reasonably access or a charge in their income over which the payment of resident fees cannot practically take precedence
  • Is temporarily in Australia

Special Disability Trust

A Special Disability Trust (SDT) is a special purpose trust set up solely to provide for the accommodation and care needs of a disabled person – the principal beneficiary. SDTs have concessional social security and tax treatment, however they’re subject to stricter rules. Immediate family members may donate to the SDT up to a total of $500,000 without deprivation rules applying.

Generally, a disabled beneficiary and their partner cannot transfer funds and assets to an SDT. However, a bequest or superannuation death benefit may be transferred to an SDT within three years of receipt by its principal beneficiary or their partner.

Leaving a bequest or superannuation death benefit to a partner with a severe disability in anticipation they’ll enter residential aged care or is an existing aged care resident, may increase that person’s social security pension and reduce their aged care fees.

For the purposes of social security and aged care means tests:

  • SDT assets up to $681,750 (indexed as at 1 July 2019) are exempt assets
  • SDT income is exempt

Aged care annuity

The aged care annuity can only be purchased by a person with an ACAT assessment. If the RAD has been fully paid, a cash reserve has been established and there are remaining funds, the aged care annuity may increase Centrelink entitlements and reduce aged care fees.

The annuity provides regular, non-indexed payments for the lifetime of the aged care resident and the full purchase price as a death benefit to the estate. It’s made up of an annuity component and insurance component. The social security and aged care assessment of an annuity purchased on or after 1 July 2019 is:

  • Annuity component – 60% of the annuity component purchase price is assessed as an asset until age 84 or for a minimum of five anniversary years, and 30% thereafter.
    60% of income payments are assessed for the income test.
  • Insurance component – If the person is over pension age, the premium paid for the insurance is assessed as an asset. If the person is under pension age, the surrender value for the insurance is assessed as an asset. No income is assessed for the income test.

When investing in an aged care annuity, it’s important to have enough cash for the needs of the person and their dependants, as commuting prior to death may result in a lower termination value than purchase price. The annuity reduces assessable assets and income and may reduce the means tested amount, however it does tie up the funds until the person’s death.

Disclaimer: This publication has been compiled by Financial Decisions (AFSL/ACL Number 341678). Past performance is not a reliable indicator of future performance. While every effort has been taken to ensure that the assumptions on which the outlooks given in this publication are based on reasonable data, the outlooks may be based on incorrect assumptions or may not take into account known or unknown risk and uncertainties. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information and any advice in this publication do not take into account your personal objectives, financial situation or needs. Therefore you should consider its appropriateness having regard to these factors before acting on it. While the information contained in this publication is based on information obtained from sources believed to be reliable, it has not been independently verified. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up-to-date or fit for any purpose; and (b) Financial Decisions nor its employees are in any way liable to you (including for negligence) in respect of any reliance upon such information or advice. March 2020

Contact: Financial Decisions PO Box 484 Mona Vale NSW 1660, T 02 9997 4647, F 02 9997 7407