Meeting aged care needs in a changing world
General awareness among financial planners about issues associated with aged care is one thing, but having a strong knowledge in this area is another, writes IOOF's Martin Breckon.
We all know we have an ageing population, and the Australian Bureau of Statistics confirms this. In the 20 years between June 1991 and June 2011 the proportion of the population aged 65-plus years increased from 11.3 to 13.7 per cent.
In real terms this means that in 12 months, the number of people aged 65-plus increased by 97,600 people and the number of people aged 85-plus increased by 20,900 to reach 415,400.
Similarly the Productivity Commission Report (released 28 June 2011) stated that “over one million older Australians receive aged care services.
The range and quality of these services have improved over past decades, but more needs to be done. Future challenges include the increasing numbers and expectations of older people, a relative fall in the number of informal carers, and the need for more workers.
By 2050, over 3.5 million Australians are expected to use aged care services each year.”
The list of supporting reports and evidence is long, but when it comes to financial advisers, being generally aware of these issues is one thing, having a strong knowledge of aged care issues is another.
In time, more will be required from advisers as competition in this area will increase, and if an adviser only has general knowledge in aged care, they will need to establish a relationship with an aged care specialist.
The new Future of Financial Advice (FOFA) legislation, particularly the best interest duty, states that if you do not have the skills, knowledge and expertise in an area, you should decline to advise.
If you do advise, then subsection 961B(2)(g) requires that you “…take any other steps as regarded as being in the best interests of the client at the time the advice is provided”.
This means you need to confidently and professionally be able to provide advice in this area.
Here to find help
Irrespective of which party is in government, aged care issues will remain and will continue to be a difficult area of policy making because of the level of government regulation, subsidy funding and private sector investment.
All governments are aware of the implications of inadequate policymaking and the sensitivity of how to finance and care for our elderly parents and relatives.
The issue resonates with ageing baby boomers, who have a tendency to change what they dislike.
Admittedly, federal funding has increased over the last five or six years, but the demand for facilities continues to rise and currently demand exceeds supply.
More money will be required as we still face a funding gap, and ultimately the family home or the inheritance will be used to fund aged care unless viable alternatives can be found.
The latest federal initiatives are more inclined to a user-pays system. When you combine this with the fact that many Australians are under-funded in superannuation, it may mean that increasingly people will have to sell the family home or the next generation’s inheritance is lost or reduced.
An ever-increasing challenge
If as individuals we consider aged care too expensive, nationally we have a greater challenge.
The Productivity Commission stated in the June 2011 report that “Australians aged 85 and over are projected to increase from 0.4 million in 2010 to 1.8 million (5.1 per cent of the population) by 2050, and it is expected that over 3.5 million older Australians will access aged care services each year.
“There is increasing diversity among older Australians in their preferences and expectations (which continue to increase), including a greater desire for independent living and culturally relevant care. This is particularly relevant for many culturally and linguistically diverse, sexually diverse, and Indigenous communities”.
The Intergenerational Report 2010 estimated that federal spending on aged care would increase from 0.8 per cent of GDP in 2010 to 1.8 per cent of GDP by 2050.
The current government is taking steps to reform the sector, partially alleviating under-supply by increasing funding for home care packages.
However, this only addresses a part of the problem: inevitably our ageing population will require the extra care which can only be supplied in specialist facilities.
The level of funds required for this level of care is currently so high, it is as if residents were still earning income from full-time employment.
This disparity may result in a larger number of informal aged carers in the future (for example a wider number of family members stepping in to help the elderly family member, though how we cope with the in-laws extended visit is another question).
The Government to the rescue?
Recent federal announcements propose significantly increased funding for nursing home places and an increase to aged care staff salaries.
But these facilities and trained staff won’t appear overnight. To complicate issues, the Federal Government needs to find this additional funding in an environment of conflicting priorities, decreasing revenue and a promise to balance the Federal Budget in 2013.
Alternatives could include diluting existing tax concessions, more stringent means testing for the age pension and a heavier reliance on user pays (which seems to be the trend).
We have already witnessed a federal propensity to allocate tax concessions and social welfare benefits to those considered the most deserving, with the introduction of reportable superannuation contributions, halving of concessional contribution caps, deferring contribution cap indexation and halving the co-contribution.
In subsection 292.5 of the Income Tax Act 1997 dealing with excess superannuation contributions, it is stated that “the object of this division is to ensure that the amount of concessionally taxed superannuation benefits that a person receives results from superannuation contributions that have been made gradually over the course of the person's life”.
The same philosophy could be promulgated in the allocation of subsidised aged care beds.
What we should do?
The Government knows that the majority of superannuation tax concessions are directed at the 30 per cent to 37 per cent tax rate.
If these are tightened and a similar basis is used for qualifying for aged care subsidies, then there will be challenges in understanding the ramifications (for example, the downstream impact on the income-tested fee).
The challenge for financial advisers will be to identify how these impacts may result in increased costs for existing or new clients, and how the required capital and revenue will need to be generated.
The average baby boomer is still under-funded in superannuation and will continue to be so in the future, irrespective of an increase in the level of superannuation guarantee contributions.
Simply, boomers do not have another 20 to 30 years of working life to make up the difference, and they need to be encouraged to make additional voluntary contributions.
They are inadequately prepared to fund user-pays aged care costs. It may mean your clients will need to create another accumulation wealth account separate to superannuation to fund aged care.
Similarly, if aged care issues (such as funding and increasing expenses) gain recognition as a national priority and a user-pays philosophy is developed, then your role as a financial adviser will be to add value to the process, and so the system should be fostered and encouraged.
When the superannuation contributions caps were introduced, advisers quickly recognised the necessity of adequate cash flow management into superannuation and the need for early recognition of when clients required an accelerated investment plan.
A similar initiative has to be taken with aged care issues. As an industry we should proactively respond to the challenges of an underfunded ageing population with pre-planning and preparation. We need to realise that selling the family home is not the only solution.
Timely research, considered planning and objective negotiation can produce a better outcome.
We need to accept that aged care advice will become a medium- to -long term financial strategy. It is doubtful that baby boomers will be satisfied if their only solution for funding aged care means creating an over-supplied property market by all simultaneously divesting the family home, whilst also trying to achieve fair market value.
Only a financial adviser dealing with the client and their family can provide the objectivity and expertise to not only supply the best financial solutions, but also to help minimise stress and family discord at a time when it is most required.
Decisions made in haste
Frequently aged care decisions are made in haste simply to secure a bed. These decisions may not be the most appropriate from a location, facilities or a price perspective.
Decisions are made on an emotive or expedient basis, where the fear of missing out or settling family discord takes priority over the balanced consideration of complex issues and financial affairs, particularly where the biggest asset is the family home.
This is when a financial adviser can provide significant value-added professional services. Many families make decisions when they are unaware of some of the fundamentals such as:
- The options with the family home
- Alternatives to fund an accommodation bond
- The existence of means-testing exemptions, and
- The ability to objectively negotiate reduced fees with the aged care facility.
Financial advice realities in this area
Aged care is a growing opportunity for professional financial advisers. Not only is aged care advice a value-added service which comfortably sits in the fee-for- service regime, but securing a constant source of referrals in this changing world needs to be a strategic priority handled with competence and confidence.
Timely advice from a financial adviser who is a specialist in aged care will not only provide a positive result for clients, but it will also provide the adviser longer and stronger relationships with clients.
Whether it is lobbying the Government to increase the level of support for aged care, or increasing your knowledge in aged care services, addressing aged care issues has moved from “maybe we should get involved” to a “we have to get involved” for advisers - and all of us in the financial advice industry.
Martin Breckon is the technical services manager at IOOF.
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