Following the onset of COVID-19, HLB Mann Judd financial adviser Luke Robson said the government responded swiftly across a number of financial channels to help households get through the uncertain period, including the superannuation system, the aged pension and aged care.
Mr Robson said advisers will need to think about the impact of these changes for clients in relation to the aged pension and aged care and also the performance of their assets during the pandemic period.
For example, if COVID-19 has negatively impacted the value of a client’s investments, property or superannuation assets, he said, then they may be eligible to receive an aged pension or have a current payment increased.
According to him, when calculating aged pension payments, Centrelink uses two tests: the assets test and the income test. Assessable assets in most cases are calculated based on market values.
Assessable income, he explained, is calculated by either looking at the actual income earned or applying a deeming rate.
“In response to COVID-19, the government has lowered the deeming rates for a single person to 0.25 [of a percentage point] on the first $53,000, and 2.25 per cent for every $1 above,” he said.
“Current cash rates are very low, so it’s unlikely you will be earning 2.25 per cent. It’s therefore important to make sure you are maximising your earnings potential on investments within your risk tolerances, as it will not negatively impact your aged pension payment.”
Mr Robson said it’s also worthwhile considering the value of an aged pension in the current environment.
“Aged pension thresholds dictate a loss of $3.00 per fortnight for every $1,000 you have over the asset test threshold. In other words, it costs you $78 a year to keep an extra $1,000 in the bank, which is effectively a 7.8 per cent earnings rate,” he noted.
“A full single aged pension is $24,551 per annum; at current cash rates of 1 per cent, you would need $2.45 million in the bank to earn an equivalent income.”
Restructuring a client’s current assets to take advantage of the aged pension may therefore result in a lucrative payment based on today’s case rates, he said.
He also pointed out that there may be new considerations for clients in terms of managing aged care costs.
“Prior to COVID-19, the choice of either paying a Refundable Accommodation Deposit (RAD) or Daily Accommodation Payment (DAP) could be calculated with more certainty where a client’s asset base supported either option,” he explained.
“Most lump sums for aged care are funded from either the family home or investment assets. Today, both of those asset pools may have experienced reductions in capital values.”
The choice is now more difficult, he said, as the client will need to decide whether to pay the 4.10 per cent DAP interest rate and keep those investment assets, or liquidate assets and accept a potential capital loss.
“Both share and property markets have recovered faster than anticipated. If this trend continues, it makes the decision to liquidate assets important and potentially very costly in the long term,” he cautioned.
