Aged care myth busted: You don’t HAVE to sell the family home to cover fees

One of the most common questions I receive from those who are transitioning into aged care – and from their families – is what to do with the family home. This is a quandary that is only going to increase because as people live longer, more will inevitably end up in aged care. In fact, the number of people in permanent aged care in Australia is expected to triple in the next 35 years, from 225,000 today to 700,000 in 2050.

People generally save for years to buy a family home, many raise their children there and so there are usually strong emotional ties to that home. But many advisors tell families to bite the bullet, sell the home and use the proceeds to pay a refundable accommodation deposit (known as a RAD – you can read more about the multiple fees associated with aged care in my article here), which can be as high as $2 million to secure a bed in an aged care facility. (The willingness to negotiate on RADs depends very much on the demand for beds – and the supply of beds – in particular aged-care facilities).

Four key questions that need to be considered before making the important, and often very sad, decision to sell the family property are, though:

• Do you need to sell the home?
• Can you afford to keep it?
• What happens if you rent it out?
• Will your decision have an impact on any pension or aged care fees?

The family home is often a couple’s most valuable asset and many advisers wrongly assume that it needs to be sold to provide funds for RADs. In fact, though, the key driver is to make sure that, like any valuable asset, the home generates a financial return, which can take the form of rental income and capital growth (which RADs certainly don’t provide). This alternative to selling the home can actually make better financial sense for some people than a sale.

Importantly too, the family home is treated on a concessional basis for the Age Pension and aged care fees – another reason for possibly not jumping into a quick sale. Its value will be excluded from the Age Pension assets test for two years from date of entry to permanent aged care and the value of the home is capped at $171,535 for aged care means testing.

Two examples clarify how the decision to sell the family home, or not, can pan out:

Example 1: Bill and Joan’s family home is valued at $660,000. They have $7,000 in the bank and receive a full Age Pension of $37,014 for a couple (current as at January 2021). They are entering residential aged care and have agreed to RADs of $275,000 each. If they sell their home to fund the RADs, their annual aged care fees will be $41,398. They will receive two full Age Pensions totalling $49,104, which will cover the aged care fees, and their cash and term deposits (now at $117,000) will provide surplus cash to cover personal expenses.

If, however, they keep their home and rent it out for $320 per week, they will pay a daily accommodation payment (DAP) of $22,550 per year on top of aged care fees of $40,340. They will receive two Age Pensions totalling $44,883 (the maximum basic rate paid to a couple who are living apart due to ill health, current as at January 2021). There will be a cash shortfall per year of $1,400 before personal expenses.

In this situation, Bill and Joan do need to sell the family home in order to provide sufficient cash flow to fund the aged care fees. Renting out the home will not achieve this.

Example 2: Jack’s home is valued at $600,000. He is a self-funded retiree with $500,000 in cash and term deposits, and he also receives a superannuation pension of $30,000. He is entering residential aged care and has agreed to a RAD of $550,000. If he sells his home to fund the RAD, his annual aged care fees will be $44,483. He will now qualify for a part-Age Pension of $6,208 per year. However, this pension along with his investment income and super pension, do not cover the aged care fees, leaving a cash shortfall of $7,000. This situation improves once he has paid his lifetime cap of $67,410 for the means-tested fee though.

If he keeps his home, rents it out for $360 per week and pays $400,000 of his savings in cash and term deposits towards the RAD, he will pay a DAP of $4,099 per year on top of aged care fees of $37,913. He qualifies for a part-Age Pension of $2,171 per year, as well as receiving net rental income of $18,200. Overall, he will have a cash surplus of more than $8,000.

In Jack’s situation, retaining and renting out the home will generate significantly more cash flow than selling it to fund the RAD.

That is not to say that either solution is right for everyone, but to highlight the importance of carefully calculating the impact of various scenarios based on your personal financial situation – and getting expert, independent advice if you’re not confident of making those calculations yourself. And also to be aware that while many people may say you must sell your home to cover aged care costs, that is not always the case.