Ageing in Australia has always been complex financially, and sadly for the oldest among us the complexities seem more severe.
Dealing with aged care, assets, pensions and funerals is something that every family must face, often after a surprise health crisis, which is why experts say it pays to be prepared.
Padua Solutions head of technical advice Rudy Haddad said there was a pile of considerations for seniors and their families, friends and carers.
“Pre-planning is vital and the earlier the plan is put together, the better,” he said.
“That’s not to say the plan shouldn’t be revised along the way, because it should be.”
It’s worthwhile being aware of these 10 financial traps that can impact the oldest Australians and families.
1. Family home finance
Many older people’s biggest asset is their home, and decisions about it can cause cash flow traps, pension problems and aged care issues.
A person’s home does not count towards pension asset tests, but if it is downsized any extra cash released will count. A home doesn’t count towards aged care means testing if one spouse still lives there, but it does if the person moving into aged care is its sole occupant.
Mr Haddad said there were often emotional issues around family homes, and having most of their wealth tied up in a house could leave older Australians cash-strapped.
He said they could potentially sell it, rent it for income, or consider reverse mortgages or the federal government’s Home Equity Access Scheme.
“While the amount that can be unlocked via the Home Equity Access Scheme is limited to 150 per cent of the maximum pension rate, there is a ‘no negative equity guarantee’,” Mr Haddad said.
Later Life Advice founder Brendan Ryan said the Home Equity Access Scheme was poorly understood.
“It’s a great scheme, tremendously useful, and the interest rate is less than half of commercial equivalents,” Mr Ryan said.
2. Asset imbalances
A long life can create unusual asset mixes, such as owning many shares in only one company. If that single stock falls, a retiree’s wealth may be hit hard.
Mr Ryan said seniors should aim for certainty in their savings and ensure their assets were not out of kilter.
“Investment structures like self-managed super funds might not be appropriate, and unwinding those setups can take a lot of time and administration,” he said.
“Someone in their 80s and looking at potential aged care options may need to focus on the security of their assets.”
Selling assets gradually to spread out capital gains might help prevent a hefty tax bill later, Mr Ryan said.
3. Death of a partner
Dying comes with age, and for pensioner couples the household change from two people to one person will reduce total pension payments and can lead to harsher treatment from Centrelink’s asset and income tests. Some seniors have seen their entire pension wiped out after their partner died, so try to understand how the system works or seek advice.
“Pension eligibility changes if one person dies,” Mr Ryan said.
“If you are getting a superannuation drawdown and your spouse dies and you are the reversionary beneficiary, it may take longer than you think for the money to keep flowing,” he said. “That can be a disaster.”
There also is a de facto death tax in Australian through superannuation. When someone dies without a spouse or other dependent beneficiary, much of their super balance can be taxed when transferred to independent beneficiaries such as adult children.
Financial planners have strategies to help people avoid this death tax, such as re-contribution or gradually reducing a super nest egg.
4. Ignoring super
Clinical psychologist and Death Literacy Institute director Kerrie Noonan said seniors often did not want to touch their superannuation because they thought it should be a legacy for their children.
“However, your superannuation and other savings can help provide the care you might want at the end of your life,” she said.
“I encourage people to think about their options.”
A majority of adult children want their parents to use whatever money they need to age with dignity.
We all get just one shot at end-of-life care, and death.
5. Rising funeral costs
Surging inflation over the past two years hasn’t just hit food, fuel, electricity and insurance. Dying is a lot more expensive.
A recent report by Australian Seniors estimated that funeral costs have increased by more than 20 per cent for burials and cremations in the past four years. In 2023, the average burial costs $11,039 and the average cremation now costs $8045.
Ms Noonan said funeral costs were not just about burial expenses.
Funeral directors used transport, catering and other services impacted by the broad cost-of-living surge of the past two years, she said.
“These are multifaceted businesses that employ humans who have bills to pay,” she said.
“Plan well for your funeral if you want to avoid family disagreements.”
Speak to a few funeral directors to understand their options and costs, as many today offer great flexibility.
6. Family fights
When disagreements become full-blown family arguments, lawyers can get called in and everything gets expensive – potentially wiping out much of mum or dad’s inheritance.
“Disagreements are often sparked by shock and surprise,” Ms Noonan said.
When dealing with grief, the surprise of being left out of a will or not getting what you believe is your fair share can escalate because of heightened emotions. And it’s not just wealthy families who fight over wills – lawyers have reported people will battle over relatively small estates.
“The more we can have these conversations before we die, it can help to prevent some of that shock and disagreement,” Ms Noonan said.
7. Failing to discuss death
It’s tough talking about age-related disease, aged care, death and funerals, so if an ageing parent or their adult child says they would like to talk about these things, “it’s time to stop and take a moment to listen”, Ms Noonan said.
She said a majority of Australians did not die suddenly.
“Seventy to eighty per cent of people die of things we know we are going to die of … Think about what care might occur in the last months and weeks of life.”
8. Home care delays
The use of home care packages has boomed in the past decade, as governments realised most people wanted to remain in their home as long as possible, and because it’s cheaper for governments than funding full aged care facility beds.
Many people leave it too late to start the process of seeking home care help and requesting an aged care assessment team to visit them, and then get stuck on long waiting lists.
“Get informed about aged care packages,” Ms Noonan said.
9. Aged care's money mix
When moving to an aged care facility, seniors and their families have the choice between paying a lump sum for a refundable accommodation deposit (RAD), an ongoing daily payment, or a mixture of both.
RAD’s can cost hundreds of thousands of dollars depending on the facility, unaffordable for many retirees. Daily payments are means tested to protect the most vulnerable, but there are financial choices to make.
Mr Ryan summed it up well: “it’s complex”.
“If you choose not to pay the RAD, you are paying a high interest rate – it’s 8.15 per cent,” he said.
“Start looking into the numbers to give you some comfort. Look at aged care providers near you and look at the government star ratings online.”
Mr Haddad said the federal government’s myagedcare.gov.au website was a good place to start, listing assessment team information, care providers and ratings.
“Ultimately it will come down to availability, services provided, the available amenities, quality of the facility itself and, of course, finance,” he said.
10. Document disasters
Without wills and other end-of-life documents, families are often flying blind when it comes to an ageing parents’ wishes, finances and end-of-life care choices.
The key documents for seniors are a:
• Will, which has instructions about who you want to inherit your estate.
• Enduring power of attorney, which appoints someone to make decisions for you about personal and financial matters, and continues if you lose the capacity to make decisions for yourself.
• Advanced care directive, which can have a slightly different name in some states and allows you to make clear legal arrangements about your future health care, end of life and other matters.
Mr Haddad estate planning was a “minefield” and also could involve superannuation death benefit nominations and guardianship powers.
“For enduring powers, these must be established before a person loses mental capacity,” he said.
“Failure to implement these in time will result in having to apply to the relevant guardianship authority in the state or territory to see who has right to deal on behalf of the incapacitated aged individual.
“Importantly, wills cannot be established, updated, amended by an attorney, so it is vital this is sorted in advance while a person is still mentally capable. Otherwise the will is not valid.”
Mr Haddad said where there were multiple beneficiaries of a person’s estate, it was preferable that a will was organised by a professional estate planning lawyer to minimise later family conflict.
Beware of cheap, simple DIY will kits, which can cause plenty of problems if a family feud happens.
Ms Noonan said estate planning documents could be prepared in one group by a solicitor.
“It means your family has access to exactly what you said you want,” she said.
The original article by Anthony Keane, The Australian can be viewed here: https://www.theaustralian.com.au/business/wealth/how-to-avoid-money-traps-with-seniors-wills-pension-and-funerals/news-story/f3212de76afe5ac78d7db6b63dc422be?btr=301e40dc16488eceb8746b709687f653