Louise Biti explores an aged care strategy that may help to improve the financial position for existing residents who have retained a former home.
Thought you didn’t need to know much about aged care? Think again.
A draft report issued by the Productivity Commission in January this year shows that a 65-year-old woman has a 54 per cent chance of needing to move into residential aged care. For a male, the chance is 37 per cent. These odds increase by another third if you take into account the chance of needing access to any type of aged care service.
With statistics like these, aged care issues are likely to impact a significant number of your retired clients. And if your clients are accumulators, they are likely to be the ones making the decisions and seeking advice on behalf of elderly parents.
The cost of aged care should be considered a normal expense of growing old and clients cannot afford to ignore the financial planning implications of aged care. The costs and strategic opportunities should be considered at all stages of financial planning.
Future reform
The Government currently spends more than $9 billion a year on aged care and this is expected to double over the next 20 years with an ageing population. Even at current levels, the supply of aged care places is not keeping up with demand. A major focus of the Productivity Commission Review is to address the funding of services and the balance between public and private funding.
To pay for aged care, the Report identified that the Government can either:
• Increase taxes – with an estimate that the Medicare levy would need to increase to 3.1 per cent to cover increasing costs;
• Reduce Government spending in other areas; and/or
• Increase the user pays system.
It is not surprising that the Report recommended reforms that would increase a person’s requirement to pay for their own aged care, with a safety net for those of limited means.
In particular, consideration is being given to changing the assessment of the home for both funding of aged care and potentially also for access to the age pension. Further details are expected when the final report is issued at the end of June.
But for now, some valuable strategies exist for clients to gain exemptions if they still own their former home.
Bonds – lump sum or periodic payment?
Accommodation bonds are payable by residents who enter either low-level or high-level (extra service) residential aged care. Once the amount of the bond is determined, the resident can negotiate to pay the agreed bond as a lump sum or as a periodic payment arrangement.
For a resident who retains his/her former home, the bond payment option can impact the Centrelink assessment. This affects eligibility for the age pension and the amount of income-tested daily care fee payable, as shown in Table 1.
It can be beneficial for a person who wishes to retain his/her former home to negotiate to pay some of the bond as a periodic payment to retain exemptions under both the income and assets tests.
Opportunities for existing residents
In most cases, advice is sought by people first moving into residential aged care. However, do any strategies exist for a client who retained the former home but paid the bond as a lump sum without realising the implications?
Once the bond has been negotiated it cannot be increased unless it can be shown that the resident receives an improved living situation that justifies the increase – for example, he/she moves to a bigger or newer room. In these limited cases the bond can only be increased up to the maximum that could have been payable when the resident first entered the facility.
If the resident moves to a different facility, the new facility cannot charge a bond higher than the bond currently held by the first facility. This applies even if the resident is moving to a better standard of accommodation. The new facility can deduct the retention amount (at the same rate that he/she was paying to the first facility) but only for the remainder of the original five-year period.
Negotiating a periodic payment
In most situations, once agreed and paid, the bond cannot be increased. However, if the resident paid the bond as a lump sum, a strategy to improve the resident’s situation may be to negotiate with the facility to repay a small portion of the lump sum bond and convert it into a periodic payment. If the former home has been retained this may allow it to remain asset-test-exempt and the rental income would also become exempt.
Implementation of this strategy requires agreement by the facility and the client should check the implications of a revised assessment with Centrelink.
Strategic opportunities are maximised if advice is sought before the person moves into aged care, but some limited opportunities exist after the move.
In all cases, it is important to focus on access to the right level of care and the person’s overall financial situation. There are close links between Centrelink, aged care fees, taxation, estate planning and cashflow management, and the person’s total financial situation needs to be considered to determine the merits of any strategy.
Louise Biti is a director of Strategy Steps – www.strategysteps.com.au
