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Aged Care And The Value Of Financial Advice

Sean Howard looks at the complexities of aged care costs and the substantial financial benefits that can be achieved with expert advice.

 

Advising on aged care can be challenging. The costs associated with aged care facilities are complex and can vary significantly depending on a person’s circumstances.

Moving into an aged care facility can also have a significant impact on social security benefits. Negative outcomes can often result when decisions are made without seeking advice. 

Aged care facilities are classified as low-level care, high-level care or extra services. A person’s care needs, as assessed by the Aged Care Assessment Team, will determine which facility will be appropriate.

The fees payable by residents consist of entry costs (include the accommodation bond or charge) and the ongoing costs (include the basic daily fee, income tested fee and extra service fee).

Careful planning around what to do with the former family home, how to fund the accommodation bond and where to invest to meet cash flow requirements can produce substantial financial benefit by helping to reduce aged care costs and increase social security benefits.

Accommodation bond

A person entering low level care or an extra service facility may be asked to pay an accommodation bond.

Each bond is negotiated individually, taking into consideration the person’s assets at the time of entry. 

There is no upper limit on the amount of the bond payable but the resident must be left with $41,500 in assets after paying the bond.

Residents with less than $41,500 in assets are considered fully supported and will not pay the bond.

Facilities need to maintain a minimum ratio of supported residents to receive maximum government funding. 

The bond may be paid as a lump sum, as a series of periodic payments or a combination of both.

A lump sum bond is held by the facility throughout the time the person remains a resident. The facility keeps any income earned on the bond and may retain a maximum of $3,876 per annum for up to five years. Where a resident dies or leaves the facility, the balance of the bond is refunded.

If a periodic payment option is chosen, the facility will charge interest on the outstanding amount of the bond for as long as the person is a resident.

The Department of Health and Ageing sets the maximum permissible interest rate which is currently 7.62 per cent per annum for the December 2012 quarter.

The accommodation bond is exempt from the social security assets test and is not subject to deeming because the resident is not earning income on this amount.

Negotiation of a higher bond in return for an offset of some of the ongoing fees may enable self-funded retirees to access the pension, or a part pension, to increase their entitlement. 

Residents who pay at least part of their bond via periodic payment can rent out their former family home and it will remain indefinitely exempt from the social security assets test.

In addition, the rental income will not count towards the social security income test or the income-tested fee (see income-tested fee section). 

Accommodation charge

A person entering high-level care may be asked to pay an ongoing accommodation charge instead of an accommodation bond.

As with the bond, each charge is negotiated individually taking into consideration the person’s assets at the time of entry.

Residents with less than $41,500 in assets will not pay the charge. Residents with more than $109,641 in assets will pay the maximum charge which is currently $32.76 per day. 

The accommodation charge will not change while the person is a resident even if their level of assets changes.

Residents who pay a charge can rent out their former family home and it will remain indefinitely exempt from the social security assets test.

In addition, the rental income will not count towards the social security income test or the income-tested fee (see income-tested fee section).

Basic daily fee

The basic daily fee is paid by all residents as a contribution towards the costs of daily living such as meals, cleaning, laundry and heating.

Standard residents1 currently pay $43.22 per day which is 85 per cent of the annual single rate of the basic age pension.

The fee will increase while the person is a resident on 20 March and 20 September each year in line with the indexation increases to the age pension.

Income-tested fee

A resident may be asked to pay an income-tested fee in addition to the basic daily fee.

The Department of Health and Ageing determines the fee each quarter, based on the person’s income information as obtained from Centrelink or the Department of Veteran’s Affairs.

Income as assessed by social security as well as social security benefits are counted when calculating the fee.

The same strategies to reduce income for the social security income test should be considered to reduce the income-tested fee.

For every $1.00 of assessable income above $31.31 per day, standard residents1 will pay $0.42 as an income-tested fee until the maximum fee of $68.65 per day is reached.

Extra service fee

People can choose to enter an aged care facility that offers extra services for an additional fee.

This enables residents to enjoy a significantly higher standard of ‘hotel-type’ extras in accommodation, food and services.

The facility sets the fee, which must be approved by the Department of Health and Ageing and varies from one facility to another depending on the services being provided.

Case study

Annabelle (aged 83) is single and has been approved and offered a place in high-level care with extra services. She is currently living in her own home but is considering selling it. Her assets are outlined in Table 1.

The nursing home has asked for an accommodation bond of $200,000 and extra service fees of $30 per day. Annabelle has the option of paying the bond by lump sum, periodic payment or a combination of both.

Step 1 – Decide to sell or keep the home

If she sells the house:

She sells the home and pays a $200,000 lump sum accommodation bond. She invests the proceeds from the sale of the home in term deposits. In this case, her financial assets will increase to $910,000. (See Table 2.)

If she keeps the house and rents it out:

She keeps the home and rents it out. She pays a $190,000 lump sum accommodation bond and makes $10,000 periodic payments for the remainder of the accommodation bond.

In this case, her financial assets will decrease to $520,000 and rent will not be assessed because part of the bond was paid via periodic payment. (See Table 3.)

Let’s assume Annabelle decides to keep the home and rent it out. 

Step 2 – Negotiate higher bond

She negotiates a higher accommodation bond of $200,000 for a reduction in extra service fees of $15 per day. Her financial assets will decrease to $320,000. (See Table 4.)

Step 3 – Invest into a lifetime annuity

She invests $200,000 in a lifetime annuity (monthly payments, nil upfront and nil on-going adviser fees). Her financial assets will decrease to $120,000. (See Table 5)

Under each option the benefit of advice has reduced Annabelle’s aged care costs and/or increased her age pension.

This has been achieved by reducing her financial assets, which are subject to deeming for the social security income test and the income-tested fee.

There is no single solution to advice in aged care as individual circumstances can require very different solutions to achieve positive outcomes.

Often decisions are not made by the person entering aged care, but by family and others, and often under duress.

As the case study shows, the value of an adviser’s expertise in aged care is readily quantifiable and of high value to clients and their families.

1Full pensioners and part pensioners with non-pension income below $10,504 (single) or $20,072 (couple) at time of entry.

Sean Howard is a technical services manager at Challenger.

 

Source: http://www.moneymanagement.com.au

 

Wealthsure Pty Ltd (ABN 93 097 405 108) nor Seagrims Pty Ltd, make no representation or warranty as to the accuracy or completeness of any statement including, without limitation, any forecasts. The opinion of Sean Howard/Challenger does not  necessarily reflect the opinion of Wealthsure Pty Ltd or Seagrims Pty Ltd.

 

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