I was chatting to a 74-year-old lady, Ms E, recently about her new romance. A long-term divorcee, she is enjoying a new relationship that looks promising, and they are starting to talk about moving in together. She is 74, he 80 - a long-term widower. They have both been independent for a long time, and have their own families with grown children and young grandchildren.
Whilst a new relationship is exciting to someone who has been alone for a long time, Ms E is worried. She owns her house which has a small mortgage on it, and claims a part age pension. She has little else, and supplements her income by taking in boarders. He owns his house outright, and has around $100,000 cash.
“What will happen to my pension?”, she asks. “If he moves into my house, what happens if I die? Will he get my house? Do I need to update my will?”
It is a good thing that she’s thinking about these matters now rather than later. As we spoke, I realised she was misinformed and harbouring a strong trust in the knowledge of her neighbour. She was quite convinced that she would lose her pension and her house and for these reasons was getting ready to walk away from her new love interest.
She is right to be concerned. Just what ARE the issues to watch out for when seniors or the elderly re-partner? Many – in fact most I would say - would wish to maintain separate financial arrangements at this stage in their lives.
Unfortunately, the law may see it differently. Let’s look at the impact on the age pension, and some estate planning issues.
What happens to the age pension if they move in together?
If one or both members of the couple claim an age (or any other means-tested) pension, then the first thing to look at will be the impact. Will Centrelink or the Department of Veteran’s Affairs actually consider them a couple? There are several aspects that Centrelink will take into consideration, and you can read more here.
It is possible to request that you continue to be assessed as singles, and these requests are considered on a case by case basis. This may be worthwhile if possible.
Assuming Ms E and her beau are considered to be a couple if they move in together, that certainly will mean a reassessment for both of them. In most cases, this will result in a reduction of their age pension, especially where (as in this case) they both own their own homes.
If he moves into her house, his home, worth around $1 million, will be treated as an investment property and assessed as an asset to both of them. If he rents it out, the rental income will count towards their combined income for the Income Test.
Both will go from being full single rate age pensioners ($860 per fortnight each), to being close to losing the age pension altogether. They will have to live on the rental income from his house and his cash savings.
What if Ms E moves into his house, renting her house out? That’s a little better. Her home is worth $700,000 with a $120,000 mortgage, net value $580,000. They will qualify for around $342 a fortnight each.
If they are considered by Centrelink to be singles, the one who moves out of their house will be the one most affected. In this case, the beau would lose his pension altogether if he moves in with Ms E due to the assets test. Alternatively, Ms E would continue to qualify for around $500 a fortnight if she moves in with him.
These questions must be carefully considered. There are other scenarios, such as if they sold one or both of their houses and bought a new place together, or they may rent out their houses and rent somewhere else together. All of them come with their own estate planning issues.
A quick note for those with grandfathered account-based pensions: remember that in order to keep the grandfathering, you must continually qualify for income support payments for the grandfathering to continue. Keep this in mind when sorting through these issues.
Will the new beau steal the house?
The short answer is: if they are living together as a de facto couple, then they may have a claim on each other’s estate.
Often the risk of claims occurring do not come from the couple themselves, but from the children of the survivor. Strong influence from an opportunistic beneficiary can be hard for a bereaved elderly person to resist.
The best frontline protection is for the couple to put in place a Binding Financial Agreement ensuring that they have no claim on each other’s assets. This may be a little costly with most local lawyers charging at least $300 an hour, but will help to ensure no nastiness down the track, and shoo away those pesky offspring.
In cases where the co-habitation is genuinely just about companionship, living as friends and flatmates, without a Binding Financial Agreement in place it would be up to the courts to decide the status of the relationship in the event of a claim. In this case, a letter signed by both parties kept with the will can be helpful. It would not be the only thing the court would rely on, but serves as a good indicator of the intentions of the couple. How Centrelink is treating them would be another indicator for the courts to consider.
A new relationship is exciting, no matter what age, and now that I’ve completely ripped the romance out of it, I wish Ms E and the beau many happy years together, comfortable in the knowledge that they have protected themselves, each other and their beneficiaries.
Alex Denham is a Financial Services Consultant and Freelance Writer. This article is general information and does not consider the personal circumstances of any individual and professional advice should be obtained before taking any action.