Why is financial advice important for clients entering residential aged care?
Most clients are not prepared for entry into residential aged care because it is typically not considered until there is an immediate requirement. It is difficult to plan for residential aged care because the need for aged care generally cannot be predicted and often is the result of an unexpected incident such as a stroke or fall. The aged care system is also under regular review and subject to reform therefore the rules are constantly changing.
The complexity of the aged care system combined with the emotions of requiring residential aged care can lead to seemingly irrational behaviour from family which can result in negative financial outcomes. Family may also be in conflict over different preferences for aged care, negative perceptions of aged care or be suspicious of each other’s motives.
Financial advice can help clients to achieve their personal and financial objectives when they enter residential aged care. Family is often involved in the process therefore mediation is important particularly where clients have lost mental capacity and are unable to make their own decisions. It can be beneficial to hold family meetings so everyone has the same information, understands the objectives, discusses the issues and resolves any differences.
What are the funding options for residential aged care costs?
The costs for residential aged care are separated into accommodation payments and ongoing care fees. Accommodation payments are determined by the advertised accommodation price and the client’s means at entry into residential aged care. The maximum advertised accommodation price is $550,000 unless the aged care facility seeks approval from the Aged Care Pricing Commissioner to charge more. Ongoing care fees are determined by the client’s means reassessed quarterly and any extra or additional services.
Accommodation can be paid as a lump sum, a daily payment or a combination of lump sum and daily payment. Where accommodation is paid as a daily payment, the client is effectively borrowing from the aged care facility at the maximum permissible interest rate (currently 5.96%). The client will have 28 days to decide on their payment method after they move into the aged care facility.
Where the client has liquid assets which are likely to earn less than the maximum permissible interest rate, they should consider selling down assets to pay for their accommodation as a lump sum. Where the client has paid for part of their accommodation as a lump sum and they have insufficient cash flow, they can have their daily payment deducted from their lump sum. Over time, this will reduce the amount of lump sum refunded to the client’s estate in the event of their death. This will also increase their daily payment over time as their outstanding lump sum increases.
Depending on the client’s means at entry into residential aged care, they may be classified as a ‘low-means’ resident and the Government will subsidise all or part of their accommodation payment. ‘Low-means’ residents may have to pay an accommodation contribution determined by their means reassessed quarterly.
Ongoing care fees include the basic daily care fee, means-tested care fee and extra or additional services fees which are generally paid monthly to the aged care facility. The basic daily care fee is capped at 85% of the single basic rate of Age Pension and is indexed half yearly. The means-tested care fee is determined by the client’s means reassessed quarterly. The extra or additional services fees are determined by the aged care facility.
Where the client has liquid assets which do not provide sufficient cashflow, they could consider investment products which provide regular income to pay for their ongoing care fees. Where the client has paid for their accommodation as a lump sum and they have insufficient cash flow, they can ask for their ongoing care fees to be deducted from their lump sum. Over time, this will reduce the amount of lump sum refunded to the client’s estate in the event of their death. This will also create an outstanding lump sum accommodation payment and subsequently the client will start paying a daily accommodation payment.
How can decisions about the former home impact cash flow for clients in residential aged care?
Centrelink entitlements and ongoing care fees make up a significant component of cash flow for residential aged care clients. 87% of clients in residential aged care receive Centrelink entitlements and 53% of clients pay a means-tested care fee towards their ongoing care. The decision to keep or sell the former home can have cash flow implications because of the assessment for Centrelink and aged care purposes after entry into residential aged care.
For Centrelink purposes, the former home is automatically exempt under the Assets Test for two years from the date the client leaves the home. For aged care purposes the asset value of the former home is exempt where the home is occupied by a protected person. Where the former home is not occupied by a protected person, the home is assessed up to the home exemption cap (currently $166,707). For Centrelink and aged care purposes, where the former home is rented, the rental income is immediately assessed. Clients who keep their former home must consider the Centrelink implications when the home is no longer exempt under the Assets Test two years after they leave the home. The client will become assessed as a non-homeowner and the net market value of the former home will be immediately assessed. There can be a reduction in Centrelink entitlements if the net market value of the former home is more than the difference between the homeowner and non-homeowner Assets Test thresholds (currently $207,000).
Clients who initially keep their former home and subsequently sell the home must consider the Centrelink and aged care implications of the sale. For Centrelink purposes, the sale proceeds will be immediately assessed and the client will become assessed as a non-homeowner. Clients often sell their former home to pay for their accommodation as a lump sum which is exempt for Centrelink purposes. There can be a reduction in Centrelink entitlements if the sale proceeds are significantly more than the lump sum accommodation payment. For aged care purposes, the sale proceeds will be immediately assessed even where they are used to pay for their accommodation as a lump sum. There can be an increase in ongoing care fees if the sales proceeds are more than the home exemption cap.
- Thresholds as at 20 September 2018
- Australian Institute of Health and Welfare – Residential Aged Care and Home Care 2013-14
- Aged Care Financing Authority – Report on Access to Care for Supported Residents January 2017
- For couples, the 2 year exemption commences from when the last member of the couple leaves the former home
- Spouse or dependent child, carer eligible for an income support payment living in the former home for the past 2 years or close relative eligible for an income support payment living in the former home for the past 5 years
Disclaimer – This document has been prepared for the general information of investors and not having regard to any particular person’s investment objectives financial situation and particular needs. Accordingly, no recipient should rely on any recommendations (whether express or implied) contained in this document without having obtained specific advice from their adviser. Jayne Graving, Arch Financial Planners and Financial Planners Alliance Pty Ltd make no representation give no warranty and do not accept responsibility for the accuracy or completeness of any recommendation, information or advice contained herein and Jayne Graving, Arch Financial Planners and Financial Planners Alliance Pty Ltd will not be liable to the recipient or any other persons in contract in tort for negligence or otherwise for any loss or damage arising as a result of the recipient or any other person acting or refraining from acting in reliance on any recommendation information or advice herein except insofar as any statutory liability cannot be excluded Under Section 849 of the Corporations Law