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The first question for someone going into residential care is normally about the home.
The decision that is made can have a significant impact on the financial outcomes for the
resident.
Putting aside all discussion around emotional or sentimental aspects around what
happens to the property is one thing. Getting to the bottom of the financial impacts is
also complicated.
Let's have a look at some of the important issues to consider with the residence.
Assessment of the former residence in means testing
The financial benefit of retaining the former residence can be compelling, but it does
hinge on a number of separate outcomes that need to be viewed all together to make
the right decision.
Means testing will impact the resident in 2 ways:
1. The Means Tested Care calculation# includes the value of the house up to a
threshold*, which is currently set at $155, 823. This threshold is very important. It
means that the value of the house over this threshold is not considered in tests. This
can represent a great opportunity if the resident is able to manage the cost of care
while hanging onto the house.
2. The house is excluded from the tests for the Centrelink Aged Pension. Further, if the
house is rented out while the resident is in care, the rental income is not included in
the tests that determine the amount of aged pension the resident is eligible for**
The first step is for the family to get a clear picture of the cash-flow outcome of selling or
retaining (and renting out) the property. This will be particularly useful when the realities of
the cost of aged care start to kick in - i.e the bills.
It also makes sense to understand what is going on, and how things will look in the future,
because amount of money moving around can be frightening.
There can be a rush to sell
Getting to the bottom of the options available is difficult, however the proceeds from a
sale are easy to understand - especially to a provider who wants the comfort of a chunk
of money to cover the cost of accommodation.
You do have a choice, and you should make sure you understand the choices that are
available.
Assume net rental income and available investment yield is 3% For illustrative purposes only. Not to be relied upon.
The care fee estimator does not help the user clarify Centrelink Pension outcomes
as different scenarios are considered. The Centrelink pension is a number that is
inputted. The reality is that different decisions available to the resident and their
family in the move to aged care will result in different Centrelink aged pension
outcomes. This work is not completed by the government calculator.
The care fee estimator does not consider changes to how assets are assessed for
the means tested care fee, depending on whether the resident uses financial assets
(e.g savings) to pay a RAD or tp pay by DAP. $200,000 held in the bank is included in
the tests and also deemed. If $200k is paid as a RAD it is not deemed, but still
considered in the test. Very confusing.
And my final gripe with the care fee estimator - it does not tell you how terrible it is
to pay by Daily Accommodation Payment if you have the money available to pay a
RAD.
Disclaimer
Every situation is different, and even if your situation is close to the one discussed, your
options may be significantly different. This is because the thresholds and system can work
in odd ways. Further, some pensions are assessed differently (e.g some DVA & disability
pensions)
The best example to work from is one we have presented to you based on your own
situation. Call us 0412 181 031
#The Means Tested Care Fee calculation includes the calculation for Accommodation
Support Payments. In the case of a house with a value greater than $155k, there would
not be any support offered.
*In this discussion we consider a single resident with no dependents or carers.
**It should be noted that there may be tax implications, like income tax on rental income
and land tax, as well as a tax offset available via the Net Medical Expenses Rebate, and
some conditions may apply.
***More alternatives are outside the scope of this post.
Please note that assumptions have been made, and this is by no means an exhaustive or
conclusive example. For illustrative purposes only, and not to be relied upon.
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Panic!
According to the Department of Social Services, nearly 44% of Australians take up an
aged care bed with one month of being assessed as needing full time residential aged
care.
About 20% of older Australians are in an aged care bed within 7 days.
This is a very short timeframe for making any important decisions, let alone making a
decision with all the emotional and logistical upheaval that is associated with the move
to residential aged care.
Table 28 : Proportion of new entrants to permanent residential care entering within a specified period after an ACAT
assessment, by level of care at entry, during 2012-13
Source: Report on the operation of the Aged Care Act 2012/13. Australian Govt Dept Social Services. Table 28
Being available with information and advice to help your client over this short time frame
is an advantage - as there will be a number of scenarios that the decision makers will need
to consider before deciding on a course of action.
Choice
If you are being called about the house in a transition to residential care, you are not
being called with a job offer, you are being called because the family is trying to work out
what choices they have, and they need specific information to help them make a
decision.
These choices are challenging to clarify, that is why you are being called.
The family will want to know a sale price and a potential rental income.
These numbers will need to be realistic, because the decision maker is trying to work out
the best way to manage mum or dads affairs while in care, and the information you
provide is going to be very important.
It can make a big difference
Did you know that as soon as the principle residence is sold, the cost of aged care will go
up?
Do you realise that the value of the property (over a threshold amount), and any rental
income will not included in the tests the government applies to aged care residents in
working out how much they will need to contribute to the cost of care?
Perhaps your competitor will.
Business will go to the agent that is keen to work with the family in making sure all their
alternatives are considered carefully - and this means having a good idea of the strategies
that will reduce the costs of residential aged care. Or at least being aware of them.
Just sell
Some agents (and some aged care providers), will suggest a quick sale of the property to
pay for care. Even the government calculator on the myagedcare website is pretty light
on on the detail required to make a well informed decision.
The agent that highlights the choices available will get the business.
Take a look at our blog Sell? Rent out? Do nothing? to see an example of just one
situation.
trusted advisor.
We can help. Phone 0412 181 031
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Simply work out the yearly interest cost, i.e $100 000 at the MPIR of 6.69%. The annual
amount is $6 690. Next step, divide this by 365 to get a daily rate - and presto - there is
your DAP - $18.33.
The resident is basically paying for the cost of the room at a high interest rate.
If the resident wants to pay $50 000 as a lump sum, and pay the remainder as a Daily
Accommodation Payment - the calculation looks like this:
$50 000 at 6.69% = $3 345. Divided by 365, this is $9.16 per day. (This is in addition to
handing over $50k as a RAD)
low assessable asset and income position (e.g assets less than $45 000), and the amount
of available support will taper down until the assessable assets reach $ 154 179.
(Note that there is an income component to the test also - we talk mainly in terms of
assets for simplicity)
How does $286 380 compare to the quoted RAD of the bed you are looking at?
Then of course all the other components had to be considered - like the basic daily fee,
accommodation costs, extra services fees and optional extras, as well as pharmacy
costs, change in pension eligibility and the rules around the home (lets not forget all the
other complex parts of this story!).
Under the new system, as implemented July 1 2014, things work a bit differently.
This new system is remarkably effective in getting older Australians to pay more for their
cost of care.
In this article we look at how the means tested care fee is applied. Its very interesting.
If the means tested care fee cap is $25 000 per year, then this works out to be about
$68.50 per day. If a single person had no other assets but $1.150m in cash, they would be
right on the the cap of $68.50 per day (or $25 000 per year). So if someone had $1.2m in
assessable cash assets, should they bother with the government testing, given the annual
result is still going to be $25 000 per year?
Here is where it gets interesting.
If a resident doesnt want to bother filling out the forms, they are still protected by an
annual (and lifetime) limit. That means that they wont pay more than $25 000 per year in
means tested care fees.
However, they basically leave the daily limit up to the government.
What is the daily limit? Well it is the extent of the payments the government pays the
aged care provider, and it can be substantial.
How high can this go? Let's find out.
Front Loading
Consider the situation where the resident has high level requirements for care. In these
cases, the government's payment to the aged care facility for providing the care could be
$208 per day, and even higher when taking into account other supplements, as outlined
in Aged Care Subsidies and Supplements. (The Residential Care Fee Estimator maxes out
at $240 per day).
What is the outcome? Well at a rate of $208 per day, the $25 000 cap would be reached
in 4 months.
Now, if properly assessed by the
government, a resident would need to
have financial assets of $2.5m to be paying
for the cost of care at this rate. (Try
punching in $2.5m in financial assets in the
Residential Care Fee Estimator).
If the resident stays at this level of care for
How would you like to pay?
Meanwhile, cash-flow has been high for one part of the year, then drops off.
However, If the resident had financial assets less than $2.5m, the government would
assess they should not have to contribute the full $208 in care fees per day. This could
make the overall cost of care be more evenly spread over the whole year. The resident
with $1.2m in cash would be limited to paying $74 per day.
This story gets more important when the resident is not in care for a full year.
What if this resident is only in care for 4 month of the that year? Without the daily limit,
they would pay $25 000 in this short period. The resident who went through the
assessment and had a daily cap of $74, will only pay $8 880.
If a resident is requiring very high levels of care, and only for a part of the year, they may
pay high levels of care fee without the benefit of a daily limit . If government means
testing means these daily costs could have been reduced, the resident should make the
most of this opportunity.
We can help.
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Sell the house to pay for care. Then the cost of care goes up. What?
So you get an estimate of the fees using the Residential Care Fee Estimator. Then, you
decide it makes sense to sell the home to pay for the fees. Make sure you know what you
are doing - as you may have just increased the cost of care. How does this work?
It works like this: The proceeds from the
sale of the home are now taken into
account when determining the means
tested care fee and any accommodation
support.
Previously most or all of the value of the
I was getting the money together to pay..then I had to
pay more? What just happened?
goes down, and the out of pocket cost of care goes up.
There may be other options here. Make sure you know what they are.
This decision will be easier to make if you have a clear understanding of the overall cost of
care.
And another thing - funds paid as a Refundable Accommodation Deposit (RAD) are not
included in assessment for the Centrelink Aged Pension. This means that payment of a
RAD may not only be saving on interest costs, but may also result in an uplift in payment
of the Centrelink Aged Pension. Are you able to take advantage of this?
The Residential Care Fee Estimator does not have anything to say about this important
choice. Make sure you are getting the whole story.
government support.
the money will run out to pay for care. Then what?!
Finally - watch for means tested care fee estimates greater than
$68.50 p.d.
These are the limits of the means tested care fee:
1. The amount of supplement the government pays for care
2. A maximum of $25 000 per year (up to about $68.50 per day)
3. A lifetime cap of $60 000.
Meanwhile, the estimator calculates a means tested care fee that has NO maximum.
However, the means tested care fee
DOES have an annual maximum.
What does this mean?
It means that in some cases the daily
means tested care fee may be charged at
a rate that is much higher than the average
of the maximum rate.
This is a real challenge for cashflow, and
very confusing for the resident and their
family.
therefore potentially increase the Centrelink Aged Pension. Meanwhile, a house and the
rent received can be excluded from Centrelink tests. A reverse mortgage could help to
satisfy care costs as they fall due, while allowing the resident to keep their house and rent
it out. This may work well for the resident - but you will want to understand the numbers.
money that allows them to reduce debt. The provider is effectively borrowing from
resident and paying no interest. This is a great outcome for the facility if they may have
previously had costly loans with the banks. They can now borrow from the resident for
free. This saves them a lot of money.
Alternatively, some providers may not have the need for RADs - in fact the payment of a
RAD may not be that much use to them if they will just put the money on deposit at a
bank for measly rates. These aged care providers may have no debt at all. If the resident
decides to pay the accommodation costs as a Daily Accommodation Payment (DAP),
they will be paying at an interest rate set by the government - currently 6.69%. These
providers will not get 6.69% by placing these funds in the bank. These providers may
prefer the resident to be paying them 6.69% instead!
This may result in the resident being told of a preference for a RAD or DAP. The fact is
that the resident has the choice. Some providers will try to make an offer that sees both
the resident and the provider get what they want. Alternatively, the provider may show
preference for a resident who is likely to pay in a way that works best for them. How do
they tell? Frankly, this balance is yet to establish itself. The aged care providers, and their
investors, are watching closely.
easier for Australians to stay at home longer, and the cost of residential aged care rises.
Make a trade off around the complexity for the time these more complex structures are
around for. They may be expensive and difficult to set up as well as dismantle, and only
for marginal benefit.
We can help
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And it is not just for the few. About 3 million Australians are over 65 and 2.25m of them
receive a full or part pension. This means that more than 70% of Australians over 65 get
an income from the government.
Put another way, 10% of Australians get an aged pension from the government.
But there is more to it than this.
In being eligible for a Centrelink Aged Pension, older Australians are also eligible for a
preferential Medicare support, and full access to the Pharmaceutical Benefits Scheme
(PBS).
This is a big story.
Australians older than 75, account for 4 times as much Pharmaceutical Benefit Scheme
support as the population average, and nearly 3 times as much Medicare support.
Another big story is that government currently pays about 70% of residential aged care
costs. In 2012, the average amount the government paid per bed was $51 400.
So how easy is it to get the money?
This analysis is from one perspective, and will remain from one perspective only - the
consumer.
Please sign up on our website to be kept informed as Later Life Advice outlines key
components of the new system over the coming weeks.
If going into residential aged care is on your radar this year, this is a story you will want to
be following.
For most people, the move residential aged care is not a decision, it's a necessity, and
decisions need to be made fast.
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We can help
Getting ready for aged care can be
complex and stressfull.
This is where we can help.
Freel free to contact us any time so we
can get you started with getting the most
for your aged care preparations.
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