Can I use annuities to assist with aged care fees?

What is an annuity?

An annuity is a financial product that provides a regular income stream in exchange for an upfront investment. You can choose to have the capital returned in full at the end, or gradually paid out as part of regular income payments. Depending on the type of annuity selected, payments may continue for a fixed period or for the lifetime of the individual. When incorporated into an aged care strategy, annuities can offer several important benefits.

One benefit of annuities for aged care residents is their treatment under the means-testing rules. Certain lifetime annuities can have favourable treatment when assessed for pension and aged care fee calculations. This may help reduce means-tested fees and improve overall affordability.

How annuities helped Barbara protect her pension and fund aged care

My client, Barbara* moved into an aged care home, and her Refundable Accommodation Deposit (RAD) was $540,000. She was receiving the full Age Pension and had some savings, with the majority of her wealth tied up in her home. Her family sold the house within three months, and given the strong property market, this meant that the RAD of $540,000 was paid in full. However, there was also a significant amount of money left over, which caused her pension to be severely reduced.

The problem for Barbara’s family was what to do with the leftover $930,000. A strong interest rate would help cover the loss of income, but there would also be tax to pay on the income earned. Paying the accommodation reduced her aged care fees because there were no more Daily Accommodation Payments (DAP), but the fees that are means-tested increased.

After speaking with Barbara’s family, we were able to understand that they were seeking an investment that was safe and would guarantee the capital, while also providing regular income, and, if possible, would increase the Centrelink Age Pension and reduce the means-tested aged care fees.

We advised Barbara and her family on an aged care-friendly lifetime annuity that guaranteed the capital while providing strong ongoing monthly payments, with no tax payable. This also improved her Centrelink Age Pension by approximately $7,000 per annum when compared with keeping her money in the bank or investing elsewhere.

Despite these advantages, annuities are not suitable for everyone. Factors such as liquidity needs, estate planning objectives, health status, and overall financial circumstances must be carefully evaluated. It is important to obtain the right financial advice to ensure that any annuity solution is appropriate and suitable for your needs and objectives.

Frequently asked questions

How can annuities help reduce aged care fees and improve pension outcomes?

Lifetime annuities are assessed more favourably than money held in cash or most financial investments. Instead of the balance being assessed, there is an instant reduction in the assessed asset value. This is particularly beneficial if pension benefits are paid under the asset test given that every $1,000 reduction in the asset test increases the pension by $78 a year (7.8%pa). Under the income test, instead income being deemed to be earned at a set interest rate on the balance, the assessed income is 60% of the actual annuity income paid. Lifetime Annuities designed for aged care provide a monthly income for life while preserving the capital invested if held for a person’s lifetime.

Are annuities a safe option for funding aged care?

In Australia, lifetime annuities are issued by life insurance companies and are subject to regulation by the Australian Prudential Regulation Authority (APRA). This regulatory framework includes capital, solvency and risk management requirements designed to support insurers’ ability to meet their obligations, even in difficult market conditions. As a result, lifetime annuities are generally regarded as a reliable option for providing secure income to help fund aged care, although the suitability of any product still depends on a person’s individual circumstances.

Are annuities suitable for everyone entering aged care?

No. While annuities can be very effective in some aged care strategies, they are not suitable for everyone. Factors such as access to capital, health and life expectancy, estate planning goals, income needs, and overall financial circumstances all need to be considered. That’s why it is important to obtain personal financial advice before proceeding.