What the proposed new aged-care levy could mean for retirees

The proposed changes may mean that not everyone is better off. Picture: Shutterstock.
The proposed changes may mean that not everyone is better off. Picture: Shutterstock.

The aged-care levy has been receiving a lot of attention - and rightly so - but it is also important to understand how the proposed system affects what you'd pay if the need for aged care arose.

Under the current system, to have your accommodation and care costs covered by the government, you have to be "fully supported", which requires your total assets to be under $51,000, and your income to be below $28,049 a year.

Under the proposed system, the government will be responsible for the cost of the aged care component, regardless of your means. All aged care residents will continue to pay the basic daily fee, and full pensioners will pay only that, currently $52.71 a day.

There will be assets and income tests, with cut-off limits in line with the age pension assessments, to determine how much you pay toward the cost of your accommodation and the ordinary cost of living.

For a single non-homeowner that means the asset threshold would be $800,250 and the income threshold $54,168, before they would make a contribution.

A single non-homeowner who is self-funded, but whose assets or income only slightly exceed these thresholds, will still have the cost of their accommodation funded by the government, but will contribute towards their ordinary cost of living, using the same taper rates for this calculation as for the pension, that is, 7.8 per cent of assets and 50 per cent of income.

Basically there will be three categories of residents: pensioners paying only the basic daily fee; wealthier retirees who pay the basic daily fee and a calculated amount for their ordinary living costs (with the government paying for their accommodation); and fully self-funded retirees who pay the ordinary living costs and accommodation costs, with aged care costs met by the government.

At face value the new means testing arrangements appear to make aged care very affordable, but the proposed changes to the treatment of the former home will mean that not everyone is better off.

Under the current system, your home is included in your aged care assets only up to a capped value of $173,075 - unless a "protected person" lives there, in which case it is exempt.

A protected person includes your partner, a dependent child, a carer who has lived in the home for the last two years who is eligible for an Australian Income Support Payment, or a close relative who has lived there for the last five years and is eligible for an Australian Income Support Payment.

Under the recommendations, the assessment of your home would mirror pension rules: the only "protected person" is your partner, and your home is exempt for two years from the date the last person leaves. After that, your home is assessed at market value and you are classified as a "non-homeowner", which gives you an extra $214,500 under the assets test.

Age Care Guru Rachel Lane points out that expert advice is essential. There will always be winners and losers. The biggest winners under the proposed new system will most likely be those who can get and keep the age pension, paying just the basic daily fee and having the government meet all of their accommodation, care and ordinary living costs.

But hanging on to that pension for more than two years after entering residential care will be tough when the home exemption ends, particularly for people in capital cities. And the biggest losers may be those who contribute to the aged care levy but never use aged care services, and those who contribute to the levy, and then pay again through means testing when they need care.

Noel answers your money questions

Question

Over many years I have been served well by the strategy of holding individual bank accounts for specific savings targets. For example, dedicated accounts for holidays, new cars, even dental expenses. However, I now need to review this strategy as each account earns so little interest. I am reluctant to return to lumping my funds together, losing sight of the progress towards those specific targets - could you suggest an alternative strategy?

I am 62 and nearing retirement, so I realise after tax contributions to super make sense - salary sacrifice to the maximum level already, but this will not provide the motivational rewards of watching individual accounts steadily grow towards their targets.

Answer

I certainly agree with the strategy of having individual accounts for specific purposes, and you could still do this for relatively small amounts, which will be used in the short to medium term. Maximising your superannuation contributions is a great idea, and one way to give yourself motivation may be to use an excel spread sheet and at least once a week enter the balances of your present accounts both inside and outside super. It's easy to do, and would take minimal time.

Question

I have been on the age pension for just two months. Believe me, it was a massive job to get all the documentation through to Centrelink and a huge relief when it was approved.

However I've just been offered a new full-time contract job for two years, which will take me off the pension. I just want to know whether I will have to go through the same rigmarole when I finish my two year term or whether Centrelink will automatically revert me to the pension once I inform them?

Answer

Centrelink advise that you will not automatically revert to the age pension. You will need to re-apply, however, if you apply online, much of the information you provided previously will be pre-filled. Just make sure you review this information particularly if your income and assets have changed (for example bank balances) since you last received the age pension. The income and assets test is required to work out your eligibility for age pension so it's important these figures remain up to date.

Question 

I am 72 retired, single, and a non-homeowner. I receive the aged pension.

I started a self managed superannuation fund years ago but the balance is now $350,000 which is entirely invested in term deposits paying 0.5 per cent. These return $1750 year, but this cost is totally taken up by the $1750 a year I'm paying administration fees.

To make matters worse rates seem to be dropping while the management fees are all rising. Would I be better off to close down the fund entirely and place all the money in the bank. I already have $20,000 in the bank.

Answer

It is pointless to have a SMSF in your situation. You could close down the fund, invest the same assets outside the superannuation system, and still be in a tax-free environment without the burden of fees. But I think there's a bigger issue here - you are only 72 which means you may have at least 15 years ahead of you. I suggest you take advice about closing down your fund and rolling the entire balance to one of the better performing major superannuation funds. Even money in the conservative option has been doing better than 4 per cent per annum over the last 10 years.

Question 

I am 65 and my wife is 57. Does her superannuation balance affect my means test for the age pension if I apply for the pension when I reach pensionable age.

Answer 

As you are a couple her assets and income will be taken into account to determine your eligibility for a pension. However, any money in superannuation is not counted until the holder reaches pensionable age, unless the money has been moved to pension mode. In that case the superannuation would be assessable.

Question

My question is about eligibility for the Commonwealth Seniors Health Card. You wrote that the department "will look at both your adjusted taxable income and a deemed amount from account-based income streams" but I wonder if income from my superannuation will be assessed. Once the pension starts you are required to draw a minimum amount each year, but this is not taxable income.

Answer

There is no assets test for the CSHC, nor is a superannuation fund in accumulation mode assessed. Once you convert your superannuation to pension mode it becomes a deemed asset and the notional amount under the deeming rules will be included in the CSHC income test. It's just a matter of going to my website www.noelwhittaker.com.au and entering your figures into the deeming calculator.

  • Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: noel@noelwhittaker.com.au