Downsizer Contribution vs Aged Care Products
Downsizer Contribution vs Aged Care Products
Aged care financial advisers are often presented with intricate scenarios and diverse client needs. Two primary considerations frequently arise when advising clients on financing their aged care— whether to opt for a Downsizer Contribution or to invest in Aged Care Products.
The dilemma of selling family home
Many clients resort to selling their family home to finance their aged care fees, particularly when the Refundable Accommodation Deposit (RAD) is still pending, leading to Daily Accommodation Payment (DAP). A common strategy is to use the sale proceeds to settle the RAD. However, when excess funds are available post-RAD payment, a critical decision must be made on how best to invest the residual sale proceeds. Advisers weigh factors such as:
- Cashflow
- Maximising social security entitlements
- Minimising aged care fees
- Minimising tax
- Estate planning
- Investment structures
Downsizer Contribution: A Viable Option
Since July 2018, eligible clients have been able to make a Downsizer Contribution of up to $300,000 into their super upon selling their main residence. This option is attractive due to the concessional tax environment of superannuation and its availability irrespective of age or total super balance restrictions. A Downsizer Contribution can offer tax-free income during the client’s lifetime and potentially to future beneficiaries, making it a straightforward and appealing option.
Aged Care Products: A Unique Offering
Aged care products present another investment avenue, offering guaranteed monthly payments for a client’s lifetime and several other advantages:
- Reduction of social security and aged care assessable assets.
- Deductible amount for tax purposes.
- Estate planning flexibility with various beneficiary options.
- 100% guaranteed death benefit payable
Comparative Considerations
Advisers often find themselves comparing the two options, evaluating the differential in earnings and estate values, among other factors. Assumed returns can significantly impact the comparison, especially given the general conservatism and risk aversion of most aged care clients.
Estate Planning and Legal Considerations
Approximately 50% of individuals in residential aged care suffer from dementia, making the ability to enter into financial contracts and nominate beneficiaries crucial. The presence of an Enduring Power of Attorney (EPOA) can help, but rules and limitations still apply, varying between products like aged care products and superannuation. Advisers need to be well-versed in these rules to ensure the client’s wishes are met, particularly in complicated beneficiary scenarios.
Cashflow Implications
Cashflow is another vital consideration, with the Downsizer Contribution often producing more surplus cashflow. However, this can also lead to concerns, especially when surplus funds are directed to lower-yielding accounts or when it interferes with estate planning wishes. Advisers must be vigilant about the rate of drawdowns and potential impacts during periods of low returns.
In Conclusion
Aged care financial advisers are tasked with the critical responsibility of guiding clients through complex decisions. Whether opting for Downsizer Contributions or investing in Aged Care Products, each option has its own set of advantages and disadvantages. The role of the adviser is not just to illuminate these choices but to tailor their advice to the unique needs and circumstances of each client, ensuring financial stability, compliance with legal norms, and fulfilment of the client’s wishes.
