Understanding the rules around your former home for both the pension and aged care is critical if you want to avoid nasty surprises.
And if you do receive what I call the “OMG letter”regarding aged care, understanding the rules will help you make the right decision.
For the purpose of calculating your cost of aged care your home is exempt if a protected person is living there.
A protected person includes: your spouse or dependent child; a carer who has been living there for at least two years who is eligible for an Australian Income Support Payment; or a close relative who has been living there for at least 5 years who is eligible for an Australian Income Support Payment
Where there is no protected person the home is assessed up to a capped value of $165,271.
From a pension assessment point of view the rules are different. Your home is exempt for as long as you or your spouse lives there and will only start being assessed two years from the date the last person leaves.
You don’t need to have a protected person (or in fact anyone) living in the home for the two year exemption to apply.
Whether you should keep and possibly rent or sell the home will depend on a range of factors
So what is the OMG letter?
Well, the OMG letter is the letter that Centrelink or the Department of Veteran’s Affairs (DVA) send out when the two years is up, informing that the former home is now included in your pension assets test, that you are now considered a non-homeowner and advising of your new pension entitlement – often zero.
The letter typically arrives a matter of days before the pension is cancelled, and the confused and panicked recipients typically exclaim “OMG!”.
This can be especially confusing when a protected person is living in the home, often a child who was a carer.
When Mum or Dad move into aged care they are told that home will be exempt, and it is for aged care but not for pension.
But here’s the good news …
If you are receiving the “OMG letter” today that means you entered aged care in 2016 (possibly earlier) – before the changes to the pension assessment of the home and rent that occurred on 1 January 2017.
People who entered aged care prior to this date are in the unique position of being able to keep and rent their former home with the asset and income (rent) being exempt from their pension entitlement indefinitely.
To have these special exemptions apply you must be paying towards your aged care accommodation by daily payment AND renting the house. The rent doesn’t need to be at commercial rates or on an arms-length basis, you can rent the home to a child or grandchild for a nominal amount. But you do have to rent the home.
Rent from the home will be included in the aged care means test, unless you entered care before 1 January 2016 (and meet the above criteria).
Whether you should keep and possibly rent or sell the home will depend on a range of factors including your estate planning wishes, cash flow, tax consequences and of course your ability to meet the cost of care.
It is a good example of how seeking specialist advice can ensure aged care is affordable and there are no nasty surprises in the future.
For further and tailored advice, contact your financial advisor.