How do Low Interest Rate Environments Affect Someone moving into Aged Care?
When someone moves into an Aged Care facility and sells their home to pay the Accommodation Payment as a Refundable Accommodation Payment (RAD, or Lump sum), if they have residual funds left over after paying the RAD, then there may be an impact on:
- Age Pension and Service Pension
The residual funds left over after selling and paying the RAD may have a negative impact on the amount of means tested pension you receive.
- Interest income of investments income received
Interest rates have been at historical lows for the last 3 years, which is great news for borrowers, but is not great for those investing their money, depending on where you residual funds have been invested, for example:
- If invested in bank accounts in the last 6 months, you would have been lucky to get an interest rate above 0.5%.
- If invested in property, the fact that property prices have risen so dramatically (i.e. a boom market, driven by low interest rates) then the rate of return (yield) received is lower than in a normal market.
- If invested in shares, managed funds or superannuation, once again any investment exposed to the share market has seen fantastic growth, but the income has been extremely low.
Therefore, a combination of reduced pension from Centrelink or DVA and reduced income from investments means that the cashflow (total income compared to total expenditure) is likely to have suffered from extreme pressure, causing a potential cashflow shortfall, where expenditure exceeds income earned.
So, What Can I do?
- Invest in other assets that deliver a higher yield (rate of income) but be wary of taking higher credit risk (risk of losing your money).
- Invest in other investments that are asset or income test friendly with Centrelink/DVA that might deliver some or more pension.
- If your investments are falling due to expenses being higher than your income, if you advise Centrelink regularly about your erosion of your capital, may entitle you to more pension as these balances fall.
- Consider moving to another facility, which the Accomodation Payment (Bond) is bigger, which may entitle to you to some or more pension than received previously. However, be careful in moving facilities as a person may lose their supported person status when changing facilities.
Keep in mind that interest rates could well be on the way back up again in the near future, but will it be enough?
If you are not happy with the pension result or cashflow you are currently receiving, give us a call on 1300 556 287 to discuss solutions that might save you more money.