Doing the sums for aged care

This article looks at the main considerations for a person moving into aged care. It does not cover all potential situations or implications and rules may differ slightly for existing residents.

The cost of residential aged care

To gain access to aged care a person will need to pay an entry fee if they have assets of more than $39,000. The entry fee is paid as an annual accommodation charge (up to $11,151 per year) in high care or a lump sum bond in low care or high-care extra-service facilities. The average bond is generally $300,000 or higher for aged care in capital cities and major regional centres.

After entry, the ongoing cost of residential aged care can average over $34,990 a year for a person in low care (commonly called hostels) and $62,880 for a person in high care (commonly called nursing homes)².

Some of this ongoing cost is paid by the Government and some by the resident. The share paid by the resident depends on assessable income and how investments are structured. Due to the high contribution by Government, the resident needs to first be approved by an Aged-Care Assessment Team (ACAT). The basic steps to move into government-subsidised residential aged care are shown in the diagram below.

Paying the bond in low care

Low-care facilities (and high-care extra service facilities) can set entry fees as a lump sum bond. The only rule in legislation is that after paying the bond, the resident needs to be left with at least $39,000 in assets. This means a person with higher assets could be asked to pay a higher bond. Generally the facility sets the bond based on commercial factors but increasingly the bonds are being matched to the person’s capacity to pay.

If a person can’t pay the requested bond (because they don’t have enough assets) they may not be offered a place. However, to receive Government funding the aged-care facility has to offer a number of places to certain residents with low levels of assets. If the resident does not have sufficient liquid assets to pay the bond, they may need to source capital from other avenues, such as:

• sell the home – pay the bond with sale proceeds and invest the balance

• negotiate periodic payments – the agedcare facility may agree to receive regular (periodic) payments instead of a lump sum

• use a reverse mortgage – borrow the required amount.

Facts about bonds

1. Bonds are guaranteed by the Government.

2. The facility can deduct a “retention amount” each month for the first 60 months. This is currently up to $318 per month.

3. The remainder of the bond is refunded when the resident moves out or passes away.

4. The bond is exempt under the Centrelink income and assets tests.

Periodic payment an alternative

Instead of paying a lump sum bond, the resident could leave the bond unpaid, in full or in part, and pay an interest component on the amount unpaid. This is calculated as: Monthly payment = [(Unpaid bond × Interest rate*) + bond retention amount^] ÷ 12

* This is a fixed interest rate and for entry 1 July–30 September 2011 is fixed at 9 per cent per annum.

^ Currently $318 per month.

Example

Martha has agreed to a $200,000 bond. However, instead of paying this amount as a lump sum she negotiates to pay regular monthly payments of: $3816 per annum (first five years), plus $200,000 × 9% = $18,000 per annum (every year).

Strategy tip

Paying all or some of the bond as a regular payment may have an advantage for residents who choose to retain their former home. If the bond is paid in full as a lump sum the home is exempt for up to two years and rental income is assessable when determining the age pension and incometested fees payable. However, if some of the bond remains unpaid, the home is rented and a regular interest payment is made to the facility, the home will remain exempt indefinitely and the rental income is not counted as assessable income. This can help to maximise the age pension and minimise the ongoing daily care fees.

Case study – funding the entry fees

Agnes is a widow and has been approved by ACAT for low level residential care. She has been offered a bed in a facility but needs to pay a $350,000 bond. Her assets are: home – $850,000; bank account – $60,000.

Agnes wants to accept the offer and consults her financial adviser on how to pay the required bond. She considers the alternatives of selling her home or paying monthly payments so she can keep her home. The financial impacts of each option are shown in Table 2.

 In the second option, the strategy to keep and rent the home while paying monthly payments on an unpaid bond allows the client to remain a homeowner indefinitely (with the former home an exempt asset) and also provides income test exemptions on the rental income. But it needs good growth on the home to be financially viable.

Daily care fees

In addition to the entry costs, residents need to contribute to the cost of their daily care. The rules are set by the Government and are the same for both low care and high care. Every resident pays a basic daily care fee but currently there are two levels: for standard residents, the fee is $40.25 per day while for phased residents the fee is $38.33 per day. Standard residents are those who receive a full age pension and part-pensioners with lower levels of private income. Phased residents are part pensioners with higher levels of private income and self-funded retirees.

Clients with higher levels of income will pay an income-tested fee to increase the amount of their contribution and reduce the cost to Government. Centrelink / Department of Veterans’ Affairs (DVA) assess private income using age pension income test rules. This income is added to any payments received from DVA to determine total assessable income. The higher this total income, the higher is the income-tested fee, up to the maximum daily fee.

Reducing assessed income

Strategies that reduce Centrelink assessed income may also reduce the income-tested fee. Some strategies include:

• gifting (limited to $10,000 per financial year or $30,000 in any five-year period)

• funeral bonds (invest up to $11,250) or prepay funeral expenses

• family home renovations (if the home is still exempt)

• investing in an investment bond through a family trust.

Professional advice needed

Without professional financial advice, the financial implications for a move into residential aged care may be complex and difficult to understand, particularly as so many issues intertwine.

It can be even more complicated if the children don’t have the authority to make financial decisions for parents. Starting to plan early allows time to consider setting up an enduring power of attorney in case it is needed in the future.

It is important that each person makes an assessment based on their own circumstances, needs and objectives.

Endnotes

¹ Productivity Commission Draft Report, Caring for Older Australians, January 2011.

² Based on 2006/07 cost estimates. Department of Health and Ageing, Ageing and Aged Care in Australia, 2008.

All rates and figures in this article are current from 1 July 2011 to 19 September 2011.

Disclaimer

The information contained in this article is of a general nature for use by financial advisers and other licensed professionals only. It has been provided in good faith but we have not taken individual objectives, financial situations or other needs into account and we recommend specific tax or legal advice be sought before any action is taken. Clients depicted are not real clients. Strategy Steps Pty Ltd ABN 14130045242, AFSL 333649.