Financial flexibility key to aged care costs

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The Aged Care Reforms due to commence on 1 July 2014 are designed to create more of a ‘user pays’ system. On the face of it, people contributing towards the cost of their aged care based on their assets and income and having a market price system for accommodation payments sounds fair and reasonable. However, the reality is quite different.

Firstly, let’s look at the group of people the government already classify as financially disadvantaged, known as supported residents.

Under the current system, supported residents are assessed solely on their assets. People with assets below $45,000 are eligible for full support and cannot be asked to pay an accommodation bond or charge. People with assets above $45,000 but less than $116,136 are partially supported and make a contribution towards the cost of their accommodation, with the government providing a ‘top up’ through the accommodation supplement to the facility.

For example, Shirley is 82 and receives the full pension. Her assets total $95,000 in cash and personal effects. Under the current system the maximum amount Shirley can contribute towards the cost of her accommodation is $50,000 as a bond in Low Care (plus a retention amount of $331 per month) or $24.04 as a daily charge in High Care. Under the new system Shirley will be assessed based on her assets and her income according to a comprehensive means test:

  • 50c per dollar of income above $24,731 plus
  • 17.5% of her assets between $45,000 – $154,179.

In Shirley’s case, the accommodation charge (or Daily Accommodation Contribution (DAC) under the new regime) would be the same pre or post 1 July.

The issue for Shirley, and many current high care residents, is that once they pay their accommodation charge plus the basic daily care fee and an allowance is made for personal expenses, the cost of living in aged care exceeds their income.

Under the new system, Shirley will have the choice of paying by a lump sum (Refundable Accommodation Contribution or RAC), a daily charge (DAC) or a combination. Calculating the lump sum amount for Shirley is done by taking the daily charge and converting it using the Maximum Permissible Interest Rate, currently 6.63%. The equivalent RAC for Shirley is $131,984 which she cannot afford to pay and the aged care facility is still required to leave her with the minimum assets amount of $45,000. So, if Shirley wants to pay by lump sum the most she will be able to pay is $50,000 and the remaining amount ($81,984) would be paid by a daily charge of $14.93. Shirley could also choose to have her DAC deducted from her RAC, but this would have the effect of reducing her assets over time.

I know it’s confusing but unfortunately, that’s the system.

Now let’s look at non-supported residents who find meeting the cost of care difficult. They are not eligible to be supported and don’t have the means to pay the market price for accommodation, they are in ‘no man’s land’ financially.

These were probably the same people concerned by stories of $1 million+ accommodation bonds and believed that a set market price was a means of reducing the amount aged care facilities can charge. The fact is that the only people currently paying $1 million bonds are those that have more than $1 million in assets, and in many cases they are receiving a discount from the aged care facility for doing so. There are facilities that have published a market price of $1 million and more post reform. Whether the market price is $350,000 or $1 million, residents who are not eligible to be supported will need to pay it.

Consider this example:

Jack and Jean are pensioners and Jack needs to move into care. Jean will remain living in the family home. They have $400,000 in investments, a car worth $30,000 and $20,000 in personal effects. The market price at their chosen aged care facility is $400,000 by lump sum (RAD) or $72.66 daily charge (DAP).

Under the current rules Jack could be asked to pay a maximum accommodation bond of $180,000 or an accommodation charge of $34.20 per day. Under the current system the aged care facility can charge Jack $180,000 but still get an average of $400,000 by charging a person with higher assets $620,000.

Under the new rules the person with higher assets can only be charged $400,000, so Jack needs to pay $400,000 or the equivalent thereof. If he chooses to pay by lump sum his maximum RAD will still be $180,000 as the assets of a couple are assessed on a 50/50 basis and the facility must leave him with $45,000. The remainder of his accommodation payment ($220,000) will need to be paid as a daily accommodation payment of $39.96 per day. While this measure is designed to ‘protect’ Jack, it actually puts Jack and Shirley in a situation where they are forced to pay interest at 6.63% when they can only earn interest from their investments at around 4%.

The person that has really been ‘protected’ is the person with higher assets, who would have paid the $620,000 bond under the old rules, as now they cannot be charged more than the market price. Because no-one can pay more, no-one can pay less so those who are less well-off will simply need to pay more.

The following example shows how people with greater financial flexibility can achieve a better outcome for themselves:

Fred is currently a part pensioner with a house worth $850,000, $500,000 of investments and $10,000 in personal effects. His chosen aged care facility has a market price of $450,000 RAD or $81.74 DAP. The estimated market rent for his house is $350 per week (net).

If Fred pays for his cost of accommodation by DAP, his cost of care will be $55,111 per annum. His pension entitlement of $372.92 per fortnight ($9,696 per annum) together with his rent ($18,200) and interest ($20,000) would leave him with a cash flow shortfall of around $7,200.

If Fred instead used $440,000 to pay towards his RAD, paid $10,000 by DAP, his ongoing cost of care would reduce to $25,674 and his pension entitlement would increase by $12,217 per annum. Fred’s cash flow would then have a surplus of around $16,800.

As is often the case, those with ‘financial flexibility’ will be best placed to meet their cost of care in the most effective way. People who have a house as well as significant assets outside their home will have the choice of keeping the house (and potentially renting it out) and utilising their savings to meet their costs. Structuring assets in this way can enable the person to receive a ‘double exemption’ on their assets for pension purposes, as the house is an exempt asset (for two years) and the refundable accommodation bond is also an exempt asset. The exemption on the family home (and any rent received) can be extended for an indefinite period where the resident pays at least some of their accommodation payment by DAP while renting the house. From an aged care point of view, the family home has a capped value of $154,179 unless a protected person lives there. Investments contribute to the means tested fee under both the asset and income tests. Moving investments to a RAD would still have them assessed as an asset but would exempt them from the income test.

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Rachel is the Principal of Aged Care Gurus and co-author of the book ‘Aged Care, Who Cares?’ with Noel Whittaker. Rachel oversees a national network of financial advisers dedicated to providing quality advice to older Australians and their families.

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