If the time has come to consider moving into residential aged care, you and your family may be faced with some significant financial decisions.
If you have a Self-Managed Super Fund (SMSF), there can be an additional layer of complexity. Your SMSF may hold a significant portion of your wealth, so understanding how it fits into your aged care and retirement planning can be important.
The good news is that planning ahead and getting the right financial advice can help you understand your options and avoid some of the stress that can come with making these decisions.
Here are five things worth considering.
1. How will you pay for your room?
Aged care accommodation costs vary between providers and facilities, so it is important to understand the price of the room you are considering and the different ways you can pay.
Depending on your circumstances, you may be able to pay your accommodation costs as a Refundable Accommodation Deposit (RAD), through ongoing Daily Accommodation Payments (DAPs), or a combination of the two. My Aged Care explains the different accommodation payment options, including how lump-sum and daily payments work.
A RAD is a lump-sum payment, while a DAP is a rental-style daily payment. You can also combine the two by paying part of the accommodation cost as a RAD and the remainder through daily payments.
A refundable lump sum is generally returned when you leave the aged care home, subject to applicable deductions and retention arrangements. My Aged Care provides further information about aged care accommodation refunds.
The right option will depend on your cash flow, assets, income, pension position and broader financial circumstances.
It can be worthwhile getting advice to compare the different options before deciding how to fund your accommodation.
2. Could your super help fund the move?
Your SMSF may be one of your largest financial assets, so it should not be overlooked when considering how to fund aged care.
Depending on your circumstances and whether you have met a condition of release, you may be able to access some of your superannuation to help fund a RAD or meet other costs.
For people aged 60 or over, super benefits can generally receive favourable tax treatment when a condition of release has been met, although the tax treatment depends on factors including whether the benefit contains taxable or tax-free components. The ATO provides information about how super withdrawals are taxed.
However, before withdrawing money from your SMSF, it is important to consider what you may be giving up.
For example, once money has been withdrawn from super, you generally cannot simply put the same amount back into the fund. Contribution caps and other superannuation rules need to be considered.
The decision is therefore not simply about whether you can access your super, but whether doing so makes sense as part of your overall aged care and retirement strategy.
3. Don’t forget about tax after death
Superannuation can be tax-effective during your lifetime, but the tax treatment can be different when your super passes to beneficiaries after your death.
In particular, adult children may be treated differently from a spouse or other eligible dependant for tax purposes. The tax outcome can depend on the type of super benefit, the beneficiary and whether they are considered a dependant under superannuation and tax law. The ATO provides further information about super death benefits and dependants.
This means the decision about whether to retain money in super or use some of it to fund aged care can have implications beyond your immediate cash-flow needs.
It may also be a good time to review your binding death benefit nominations and broader estate planning arrangements to make sure they continue to reflect your wishes.
4. Who will manage your SMSF if you can’t?
One of the most important questions is also one of the easiest to put off:
What happens if you can no longer manage your own financial affairs?
If illness or declining capacity means you can no longer perform your role as an SMSF trustee, having an appropriate enduring power of attorney (EPOA) in place can help provide a pathway for someone to act in your place, subject to the requirements of superannuation law and the fund’s governing documents.
The ATO confirms that a person who holds an appropriate enduring power of attorney can, in certain circumstances, become a trustee of an SMSF or a director of its corporate trustee in place of a member. There are specific requirements around the appointment, the EPOA and the trustee structure. See the ATO’s guidance on enduring powers of attorney and SMSFs.
Think carefully about who you appoint. They may ultimately have significant responsibility for managing one of your largest assets.
It is also important to make sure the SMSF’s trust deed, corporate trustee arrangements and estate planning documents work together.
5. Rethink the structure
For some people, the aged care planning process may raise another important question:
Is an SMSF still the right structure for the next stage of life?
There is no single answer to this question. It will depend on why the SMSF was originally established, the benefits it provides, the fund’s investments, its costs and complexity, and the changing needs of its members.
As circumstances change, it may be appropriate to review whether the SMSF continues to provide the flexibility and benefits you need.
This does not necessarily mean winding up an SMSF. It simply means considering whether the structure remains appropriate as part of your broader retirement and aged care plan.
Need help with aged care decisions?
Aged care decisions can involve your superannuation, investments, cash flow, tax, estate planning and government benefits, so they are not decisions you need to make alone.
At Holzworth Partners, we can help you understand how aged care decisions may interact with your broader financial and retirement strategy.
If you are considering a move into residential aged care, reviewing how to fund your accommodation or wondering whether your SMSF remains appropriate, contact us on 07 3999 9751 to discuss your circumstances and next steps.
Important information: This article provides general information only and does not constitute personal financial, taxation, legal or aged care advice. It has been prepared without considering your objectives, financial situation or needs. Aged care fees, superannuation rules and tax treatment can be complex and may change over time. You should obtain appropriate professional advice before making decisions about your SMSF, superannuation, aged care arrangements or estate planning.