NOEL WHITTAKER: Pensioners feel the pinch

Using rental income to pay for aged care is set to get harder from next year. Picture: Virginia Star
Using rental income to pay for aged care is set to get harder from next year. Picture: Virginia Star

THE squeeze on our senior citizens continues. One element of last month's budget that has received little publicity is a new measure to remove the rental exemption on the former home when a person is living in aged care.

This exemption currently applies to people who pay towards the cost of their aged care accommodation by daily payment. The exemption applies to the rent for the purpose of calculating the means-tested care fee; it also applies to both the rent and the asset for the purpose of calculating pension entitlement. The exemptions for pension purposes are being maintained.

The changes are due to come into effect on January 1, 2016, and are projected to save the government just $26.2 million over five years. Obviously it's small bickies right now, but the number will grow exponentially as baby boomers reach an age where aged care may be necessary.

The government has called it a way of "improving the fairness and equity of aged care means-testing arrangements for new residents entering aged care from 1 January 2016" - in reality it makes it hard for people to use their former home to generate income to meet the cost of care. Those hit hardest of all will be people with few assets outside the home and limited income sources - in other words, pensioners.

Shirley is a full pensioner, with a house that produces $400 a week rent, $60,000 in the bank and $2000 in personal effects. She's paying a Daily Accommodation Payment of $69.70 a day (which is equivalent to a $400,000 Refundable Accommodation Deposit).

Under the current rules, Shirley's means-tested care fee is $1.70 a day and her cash flow shortfall is around $2000 a year. If Shirley moved into care after January 1, 2016, her means-tested care fee would rise to $26 a day and her cash flow shortfall would increase to around $11,000 a year.

Contrast this with Betty, a part-pensioner, who receives $600 a week in rent, has $250,000 in the bank and $20,000 in personal effects. Betty has paid $650,000 by Refundable Accommodation Deposit and is paying a Daily Accommodation Payment of $8.71 a day.

Under the current rules, Betty's means-tested care fee is $45 a day, giving her a cash flow surplus of $14,170 a year. Under the new rules, Betty's means-tested care fee would be $88 a day, and she would have a cash flow shortfall of $1500 a year instead of a healthy surplus.

The new rules mean that pensioners are going to have to change their attitudes about keeping and renting their home as a way of funding aged care costs, particularly if there is not a lot of capital outside the house.

While this sounds simple, and may look like a fair and reasonable outcome at a quick glance, there are other factors that come into play. Since the aged care reforms were introduced on July 1 last year, the amount someone can pay to an aged care facility has been capped at a "market price", making it hard to exchange an exempt asset (their home) for an exempt asset (their refundable accommodation deposit).

The money "left over" reduces their pension, and will most likely reduce it even more, after the new asset test changes take effect in 2017. The sting in the tail is that ANY amount paid as a refundable accommodation deposit is included in the assets for the aged care means-tested care fee, along with the money "left over", thus pushing up the price of aged care. It is a complex system and not getting simpler.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any  decisions. Email: noelwhit@gmail.com.