Given the changing policies and needs associated with retirement, this article explores tax strategies, funding options, and transitions to aged care, along with important factors to consider during this process.
Key Superannuation Strategies for Aged Care
Superannuation plays a vital role in financing aged care services during retirement. Effective planning around superannuation access can help minimise tax burdens and enhance retirement income. Here are some important strategies:
Transition to Retirement (TTR) Strategy
- Individuals aged between preservation age and 65 can access a portion of their super through a Transition to Retirement (TTR) income stream. This can provide additional income or allow for a gradual reduction in working hours while still receiving superannuation income.
- Investment earnings on assets supporting a TTR pension are tax-exempt if you are 60 or older. Furthermore, withdrawals from the superannuation income stream are also tax-free for those aged 60 and over.
Re-contribution Strategy
- If your superannuation includes both taxable and tax-free components, you can withdraw a lump sum and then re-contribute it as a non-concessional (after-tax) contribution. This approach can lower the taxable component of super, reducing potential taxes on death benefits for non-dependents, such as adult children.
Downsizer Contributions
- For those aged 55 or older (from 1 January 2024), a one-time non-concessional contribution of up to $300,000 (per person) from the sale of a primary residence is allowed. This can enhance super savings and support future aged care expenses.
- Downsizer contributions are exempt from standard super contribution caps and do not require a work test.
Age Pension and Superannuation
- Upon reaching the pension age (which is gradually increasing to 67), your superannuation balance will be included in the assessments for assets and income regarding Age Pension eligibility. Proper management of super can enable individuals to qualify for a partial Age Pension alongside super income.
Tax Considerations for Aged Care
Residential aged care incurs various costs, such as accommodation payments, means-tested care fees, and basic daily care charges. Planning effectively is crucial to managing these expenses in a tax-efficient manner.
- Accommodation Payments: Refundable Accommodation Deposits (RADs) are lump sum payments made to aged care facilities and are tax-exempt. However, if you opt for a combination of RAD and Daily Accommodation Payments (DAP), the DAP is derived from income and superannuation and may have tax implications.
- Means-Tested Care Fees: These fees are determined by your assets and income, including superannuation. Strategic planning can assist in lowering these fees through efficient management of income and asset withdrawals.
- Gifting: Transferring assets to family members may decrease assessable assets and income, thereby reducing aged care fees or improving pension eligibility. However, gifting rules limit you to gifting $10,000 per financial year or $30,000 over five years without affecting Age Pension or aged care fees.
- Pension Income: If you receive a pension from a super fund, income drawn from a tax-free pension account (for those 60 and above) is not taxable. This can help manage tax liabilities while covering aged care costs.
- Rental Income: Renting out your family home to fund aged care may result in taxable rental income. Nevertheless, it’s possible to offset some of this income using deductions for expenses such as mortgage interest, repairs, and maintenance.
- Utilising Super for Aged Care Costs: Accessing superannuation in lump sums or as an income stream to pay for aged care expenses can be a tax-efficient method, especially for individuals over 60, as withdrawals are generally tax-free.
Retaining or Selling the Family Home
- A significant decision when moving to residential aged care is whether to sell the family home or rent it out to cover the Refundable Accommodation Deposit (RAD) or other related fees.
- Selling may generate cash for a RAD, while renting can provide a steady income, but may have tax consequences and affect Age Pension eligibility.
Aged Care and Centrelink
- When determining aged care fees or pension eligibility, your superannuation and other assets will be evaluated under Centrelink’s means tests.
- Deeming rates are applied to financial assets, including superannuation income streams and bank accounts, to assess income for Centrelink purposes. Reducing assessable income can help lower aged care fees or enhance government support.
Home as an Exempt Asset
Your primary residence is exempt from Centrelink’s asset test while you live in it. However, once you enter permanent residential aged care, the home may only be partially exempt (up to a capped value), potentially raising the assessable assets for aged care fees and Age Pension calculations.
Transitioning to Aged Care – Key Considerations
The move to aged care in Australia entails important considerations that must be addressed for a seamless transition. These include:
Assessment and Eligibility
An assessment by an Aged Care Assessment Team (ACAT) or the Aged Care Assessment Service (ACAS) in Victoria is necessary to determine eligibility for government-funded aged care services. This assessment gauges the level of care needed (home care, residential care, respite care).
Care Options Include:
- In-home care (for individuals wishing to stay at home with assistance).
- Residential aged care (for full-time support in an aged care home).
- Respite care (short-term care offering breaks for caregivers).
- Retirement villages (providing independent living with service access).
Costs
- Understanding the costs associated with aged care is crucial and may include:
- Accommodation fees (either refundable or non-refundable for residential aged care).
- Means-tested care fees (based on your financial situation).
- Basic daily care fees (contributing towards care services).
- Additional services (for enhanced amenities, etc.).
- Government subsidies play a significant role in subsidising aged care services, with the level of assistance determined by individual financial assessments.
Choosing the Right Aged Care Provider
- Consider factors like location, facility quality, and available activities and services. Visiting multiple facilities is recommended to assess environment, staff, and overall care quality.
- Examine staff-to-resident ratios, qualifications, and the standard of care services offered (e.g., medical care, recreational options, and specialised care for conditions such as dementia).
Emotional and Psychological Impact
- Adapting to such a transition can be emotionally taxing for both the individual and their family. A strong support system is vital to support the emotional wellbeing of the transitioning individual, who might experience a sense of lost independence or anxiety about the changes.
- Involving family in the decision-making process can facilitate the transition and provide emotional support.
Legal and Administrative Issues
- Establishing an Enduring Power of Attorney (EPOA) is crucial for managing financial and healthcare decisions. An EPOA allows a trusted person to oversee financial and legal matters should the individual be unable to do so.
- Advanced care directives outline preferences for medical treatments and care should the individual be unable to communicate their wishes.
Health and Care Needs
- It’s important to select an aged care facility or home care provider that can address specific health needs (e.g., dementia, physical disabilities, or chronic illnesses), providing appropriate medical care and support.
Cultural and Personal Preferences
- Culturally sensitive care: Many aged care providers offer services that respect cultural sensitivities, including language support for non-English speakers.
- Personalisation of care is important, such as accommodating dietary needs, religious practices, and lifestyle choices.
Government Resources and Support
- My Aged Care: This government portal is an essential resource for information regarding aged care services, providers, and financial assistance, helping individuals navigate the aged care landscape and understand eligibility, services, and funding options.
By considering these factors and seeking appropriate professional guidance, the transition to aged care in Australia can be carefully planned, ensuring a better quality of life for the individual.
Superannuation Changes
- Reduction of the Downsizer Age to 55: From 1 January 2024, the eligibility age for downsizer contributions has been lowered from 60 to 55, allowing more individuals to enhance their super balance by selling their family home.
- Legislative Cap on Superannuation Balance:
- A $3 million balance cap on superannuation will be introduced as of 1 July 2025. Individuals with super balances exceeding this cap will incur an additional 15% tax on earnings beyond the limit.
Conclusion
Developing a robust tax strategy for aged care involves careful management of superannuation, pension entitlements, and assets. By understanding the tax implications of superannuation withdrawals, efficiently managing aged care expenses, and planning around Centrelink and income testing, individuals can optimise their financial situation during retirement and aged care transitions. Consulting a financial advisor can provide personalised recommendations to ensure adherence to regulations and maximise available benefits.
Engaging with an expert in aged care can assist you in making informed decisions concerning funding options, asset utilisation (such as the family home), and managing ongoing costs. They can also offer guidance on government entitlements, such as the Age Pension.
