Explaining superannuation’s impact on Aged Care

Superannuation is often a client’s largest asset, after their home. So it is not surprising that it can have major impact on aged care fees. But it can also provide strategic advantages.

In this article, we explain how superannuation impacts aged care.

Superannuation is an asset

It is true that a client might be asked to pay a higher share of their aged care costs (as a means-tested fee) if they have investments when entering residential care. But clients will only ever pay a portion of the costs, because taxpayers subsidise the costs for everyone in residential care.

How much a client pays is determined by a complex set of means-testing rules that pick up all assets and income, including superannuation and income streams.

The assessment rules for superannuation are the same whether you the client is applying for an age pension or calculating the aged care fees. This article discusses how these investments are assessed for aged care.

Accumulation phase of super

If money is still in the accumulation phase of superannuation, the assessment rules are quite straightforward.

A person accessing residential aged care is likely to be over age/service pension age (currently age 67 for Centrelink or age 60 for Veterans’ Affairs). If so, the balance of superannuation in their name in the accumulation phase is fully assessable as an asset.

Accumulation balances (and the earnings) are only exempt if held by a person who is younger than age/service pension age. Transferring savings into superannuation in the name of a younger spouse may help to reduce the impact on aged care fees for an older spouse, but the full financial circumstances should be reviewed to check whether the overall outcome is beneficial and to consider the impact of preservation rules.

Means-testing of aged care fees is the result of combined assets and income tests. If the superannuation savings are counted as an assessable asset, it will also be subject to deeming rules to calculate an assessable income component.

Income stream phase of super

The assessment rules for income streams are more complex due to the range of different income stream types and changes over time which have implemented grandfathering rules. The key rules are summarised in the table below.

Income stream type	Asset assessment	Income assessment
Account-based pension – purchased before 1 January 2015	Current balance is fully assessable.	Deductible rules apply if the owner has received a means-tested payment from Centrelink/DVA continuously since 31 December 2014. This means the income received each year, less the portion that is considered to be a return of money is an assessable asset. In all other cases (including self-funded retirees) deeming rules apply.
Account-based pension – purchased from 1 January 2015 (including rolling to new account)	Current balance is fully assessable.	Deeming rules apply.
Lifetime or term -purchased before 20 September 2004	If structured to meet the complying rules (including not commutable) it may be 100% exempt. Other cases depend on the features.	The income received each year, less the portion that is considered to be a return of money, is assessable (deductible rules).
Lifetime or term -purchased 20 September 2004 to 19 September 2007 (inclusive)	If structured to meet the complying rules (including not commutable) it may be 50% exempt. Other cases depend on the features.	The income received each year, less the portion that is considered to be a return of money, is assessable (deductible rules).
Lifetime or term -purchased 20 September 2007 to 30 June 2019 (inclusive)	Assessment depends on the features.	The income received each year, less the portion that is considered to be a return of money, is assessable (deductible rules).
Lifetime or term - purchased from 1 July 2019	Assessment depends on the features, age of the recipient and term expired. It may be possible to receive a 40% or 70% asset test reduction.	If the income stream meets capital access rules (ie rules around a declining withdrawal or death benefit value) 60% of the income received each year is assessable and the rest is exempt. Otherwise deductible rules apply.
Defined benefit (non-commutable)	Exempt.	The income received each year, less the portion that is considered to be a return of money, is assessable (deductible rules).

Strategic opportunities

Paying for aged care will require decisions around which assets to keep and which to sell.

Clients may also be faced with decisions about how to invest any money left over after selling a home.

If assets include superannuation, the estate planning and impact of tax on death benefits are important to weigh up. For example, if the client does not have tax dependents, they may wish to consider cashing out superannuation or income streams while they have access to the money tax-free.

But this will take their money out of the superannuation environment, so how the client’s estate is to be distributed and the potential for disputes should be taken into account before making these decisions.

Superannuation, taxation, estate planning, aged care fees and age pension are each complex sets of rules and are intertwined for clients moving into residential aged care. Before making decisions, seeking financial advice from an adviser who is registered on the ASIC Financial Adviser Register and is accredited in aged care advice is vital to ensure you make the right decisions for your situation.

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Explainers authored by Louise Biti, Director Aged Care Steps.

Disclaimer: The information in this article is general and does not take into account your particular circumstances. We recommend specific financial tax or legal advice be sought before any action is taken to apply the rules to your specific circumstances. Refer to the relevant Product Disclosure Statement before investing in any product. Aged Care Steps ABN 42 156 656 843 is holder of AFSL 486723. Current as at 16 May  2024.