Under strategy A, the net effect of the income test would have reduced Reg’s DVA service pension by around $184 to approximately $524 per fortnight – so it was immediately rejected.
In terms of maximising Reg’s service pension and reducing fees, strategies B and C would deliver similar outcomes. But given that strategy C also incurred the cost ($1500) of establishing the necessary family trust structure, and the family wanted to keep things simple, Nigol recommended the implementation of strategy B.
By reducing the level of deemed income under the DVA income test, Nigol says purchasing an annuity will also limit the impact on Reg’s rate of service pension, as well as aged-care income-tested fees.
“Under strategy B, Reg’s service pension entitlement will decrease marginally to $667 per fortnight,” says Nigol. “This is determined by a myriad of factors, including marital status, home ownership, and level of assets/income.”
Once aged-care fees and living expenses are accounted for, strategy B leaves Reg with a net cashflow of $33,687 (including a $29,000 return of his capital) in the first year – increasing by 3 per cent annually thereafter – while strategies A and C would have reduced his net cashflow to $8422 and $4964 respectively.
Fixed income
Nigol recommended that Reg use surplus funds from the sale of the house to take out a 10-year annuity, which makes monthly income payments, indexed at a fixed rate of 3 per cent annually.
Reg had alternative investment options, such as cash, term deposits, managed funds or shares. But Nigol says that had Reg gone for one of these options, he would have risked the possibility of his cash reserves running out, leaving his daughters to meet outstanding income requirements – unless investments were sold.
“While annuities are not as liquid as cash, they remain a highly secure investment, and as such [are] the most appropriate for Reg’s requirements,” he says.
Due to the way the DVA assesses such investments, Reg – classified as a standard resident, according to Department of Health and Ageing (DHA) rules – will pay a slightly higher basic daily fee. But he will receive a reduction in daily income-tested fees, while his DVA pension entitlements will increase.
“This leaves a much lower assessed income, resulting in a good DHA income-tested fee outcome for Reg,“ says Nigol.
Tax implications
Nigol says the annuity also works well from an income tax perspective, because the capital component of annuity payments is excluded from taxable income.
The Medical Expenses Tax Offset also ensures that Reg won’t pay any tax on the remainder, Nigol adds.
“That’s because aged-care fees and accommodation costs qualify as a medical expense under the Medical Expenses Tax Offset,” he says. “Reg is able to claim 20 per cent of net medical expenses and accommodation costs over $2000.”
The structure of annuity products prevents Reg from making further contributions to his annuity once it’s started; and he is not able to make lump-sum withdrawals either. The remaining capital is paid out at the end of the 10-year term – unless he dies, and then the balance is paid to his estate at that time.
But it may be appropriate to start additional annuities as Reg’s cash reserves grow, Nigol says.
“We need to ensure that as a consequence of Reg’s high surplus cashflow his level of assets doesn’t exceed the upper threshold of the DVA assets and income tests, as this could adversely affect his service pension entitlements,” says Nigol.
Win-win
Looking back, Nigol says he’s been able to deliver a win-win aged-care outcome for Reg and his future benificaries. Critical to this outcome, he says, was the preservation of Reg’s service pension, as this prevents him from having to dip into savings to fund his care expenses and retirement – allowing his capital to last longer. To lighten the future burden on his family, Reg has also made arrangements for a funeral bond.
Reg’s Pensioner Concession Card also helps to cover living costs by reducing the cost of medicine and providing other concessions.
In the event of Reg passing away within the 10-year term of the annuity, Nigol says the annuity will end and the remaining balance will be paid to his estate.
In some instances, where a couple is involved, he says one spouse may nominate their partner to continue to receive income payments from the annuity – but since Reg was alone, this wasn’t appropriate. In addition to sharing what’s left of Reg’s annuity when he dies, Nigol says it was important for the Sullivan daughters to understand that the balance of any unused accommodation bond – after deduction of a monthly retention – would be paid back to his estate. Based on DHA regulations, the maximum retention amount that can be deducted from Reg’s accommodation bond is $18,450 over five years, or $307.50 per month.
Given the significant difference it makes to Reg’s net cashflow position, Marcia says the decision to run with strategy B was one that all family members were immediately comfortable with.
