Are you ready for aged care reforms?
Impending changes to aged care legislation will have many questioning whether or not they should sell their homes. And advisers will have a crucial role in steering their clients in the right direction, as Nathalie Bouquet explains.
From 1 July 2014, changes from the aged care reform package will take effect. The need for financial advice will be greater than ever as the changes will result in many new residents facing higher costs after 1 July.
Key changes to residential aged care
The distinction between low and high level care will be removed. From 1 July, there will be one type of aged care assessment team (ACAT) approval for residential aged care.
The current accommodation bond and accommodation charge will be replaced by accommodation payments. This will take into account the resident’s assessable income and assets.
New residents will have more flexibility to structure accommodation payments as:
- A lump-sum refundable accommodation deposit (RAD);
- Periodic payments, also known as a daily accommodation payment (DAP); or
- A combination of both RAD and DAP payments.
New residents will have 28 days after they enter a facility to decide how to pay for their accommodation. This will allow more time to determine the best way to structure payments.
Facilities will no longer charge retention amounts, which are currently deducted from lump sum bonds. This will likely result in facilities charging higher accommodation prices.
A means-tested care fee will replace the income-tested fee to determine ongoing care fees. The means-tested care fee will be calculated using a resident’s assessable income and assets, and is subject to annual and lifetime caps. (As at March 2012, the caps were $25,000 annually and $60,000 over a person’s lifetime).
Disclosure of accommodation prices
Residential facilities will be required to disclose accommodation prices on their website as well as the Government’s new My Aged Care website. Published prices will give greater clarity to planning strategies.
While the published price will be the maximum a resident can be asked to pay, accommodation payments can still be negotiated down.
Facilities will need to seek approval from the Aged Care Financing Authority (ACFA) to charge accommodation payments greater than $550,000.
Keeping vs selling the home
The home will be exempt from the means-tested care fee if occupied by a protected person such as a spouse.
If a protected person does not reside in the home, a portion of the home’s value up to a cap will count (as at 20 March 2012, cap is $144,500). If the home is sold, the entire proceeds will count to determine the means-tested care fee.
For many new residents, the means-tested care fee will be significantly lower if the home is kept. Keeping the home will also likely result in higher age pension entitlements as it will remain exempt from the Centrelink income and assets test if:
- part of the accommodation Payment is paid as a DAP; and
- the home is rented out.
The decision to keep or sell the home will need to be considered alongside any ongoing expenses and maintenance.
Accommodation payments
The RAD lump-sum balance is exempt from Centrelink’s income and assets test. It will however, be assessed as an asset to determine the means-tested care fee.
More consideration may be given to structuring accommodation payments as a DAP and keeping the home where the home is fully or partially exempt, compared to selling the home and paying a RAD where the entire balance is assessable.
Means tested care fee
The calculation of the means-tested care fee means strategies that reduce a resident’s income and assets will play an important role in managing ongoing care fees.
Now is a good time to discuss options with clients who are considering moving into aged care, as upcoming reforms are only months away.
There are strategies and products available that can give peace of mind. Seeking good advice can help clients reduce aged care costs, increase age pension entitlements and help guide them through the transitional and emotional process.
Case study
Sue is 88, single and has been approved for residential aged care. She has decided to sell her home and will have assets of $400,000 to invest after paying an accommodation bond/deposit of $300,000. Her ongoing care fees will depend on whether Sue moves in before or after the reforms take effect.
Her ongoing care fees will be made up of basic daily fees of $16,555 per annum plus
- $1,926 as an income-tested fee or if she moves in before 1 July 2014
- $11,362 as a means-tested care fee if she moves in from 1 July 2014.
Ongoing fees from 1 July are calculated using the latest published rates and thresholds and will be indexed on 1 July.
Sue is likely to pay much more for her ongoing care fees from 1 July 2014 as a result of including her assets to calculate fees. Assume after seeking financial advice, Sue purchases a lifetime income stream for $200,000 which provides annual payments of $8,000.
Sue’s payments do not count for Centrelink or aged care income testing as they represent a return of capital under the Centrelink and aged care rules. (The return of capital is calculated by dividing the purchase price of the income stream by Sue’s life expectancy of 5.68 years).
The purchase of a lifetime income stream helps to reduce Sue’s care fees. Before 1 July, Sue’s income-tested fee is reduced to zero and from 1 July her means-tested care fee is reduced to $9045 in the first year.
Nathalie Bouquet is head of technical services at Challenger.
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