The impact of aged care reform on planners and their clients
As the June 30 deadline for the aged care reform package quickly approaches, Anna Lawton looks at how the changes will affect planners and their clients.
The aged care reforms will likely see retirees paying more for their admission to, and ongoing care in, aged care facilities.
Additionally, the changes in the asset and income test treatment could see two retirees with similar asset levels paying wildly varying amounts for their aged care services.
In the first instance, if a move to an aged care facility is something that is being considered as likely in the next six to 12 months, it may make sense for families to consider making the move before June 30.
The cost of aged care after this date will increase, particularly for part pensioners and self-funded retirees.
How much they will pay will depend on their asset and income level, whether they remain homeowners once in care, and how much they pay for the cost of accommodation, called the Accommodation Payment.
Accommodation Payments will be structured slightly differently to the current system, which will mean most people will pay more for the right to reside in care. Asset and income levels will determine how much they need to additionally contribute towards their daily care payments in the form of the means-tested fee.
The current system of accommodation bonds will be replaced with refundable accommodation deposits (RAD). Period payments will be replaced with daily accommodation payments (DAPs).
Providers will be obliged to start advertising their prices from 19 May 2014, and until this time there is no certainty about how much accommodation payment a provider will charge those entering care after 30 June.
However the expectation is it will cost more.
What we do know is that the maximum accommodation payment that can be charged by a facility will be $550,000.
Those aged care providers wanting to charge a higher amount will need to apply for permission to do so, and will need to provide justification for the higher price.
The biggest change will be that a resident’s co-contribution will be assessed based on both assets and income rather than the current system of income only. As a result, no one situation is going to be straightforward and simple.
The amount of RAD a person pays will count in the means-tested fee calculation. As a result the current simple strategy undertaken by most - to sell the house, pay the bond, keep the pension and cover the fees - will no longer be a given.
The means-tested fee (MTF) will impact significantly on a person’s cash flow resulting in the resident having to fund many out-of-pocket expenses – such as medications – from income earned on their investments, if there is any left over, or more likely by drawing down on capital.
The biggest change from a resident’s cost point of view is that RADs will count as an assessable asset for the means-tested fee, while only the first $153,905 of a principal residence will count as an assessable asset.
No one situation will be simple anymore. It is entirely possible that two aged care residents will face a different financial outcome, despite having essentially the same level of assets, as the following example shows.
Take the case of Resident A, who has a house worth $500,000 and cash assets of $200,000, and that of Resident B who has sold the house for $500,000 and so now has cash assets of $700,000.
The varying treatment of cash assets and principal residence assets means that Resident A has total assessable assets of $353, 905 (made up of $200k cash plus $153,905 of house) compared to Resident B whose total assessable assets would be $700,000.
The different assessable asset levels of each, due to Resident B selling their house, results in Resident A paying a MTF of $5.50 a day versus B who pays a MTF of $27 a day.
This is because although Resident A’s home is worth $500,000, only the first $153,905 is included in this means test whereas Resident B’s full asset value of $700,000 counts.
The example above demonstrates the difference in MTF in isolation. If we add into the mix that the accommodation payment required is $400,000, Resident A, whilst paying a small MTF, will need to pay a DAP on $250K which is $45 per day.
From a cash flow point of view, covering the overall cost of living will be a challenge. The overall cost of living for Resident B would in fact be less than Resident A, even though their MTF is significantly higher, but Resident B still will have a difficult and tight cash flow problem.
In terms of income, Resident A will need significant and reliable rental income to supplement the age pension and cover their aged care costs. Resident B will be reliant on the $300,000 to generate enough income to cover what the age pension does not.
Term deposit rates are not all that generous at the moment, and appropriate investment options would need to be investigated to ensure Resident B has sufficient income.
Obviously, it is important to ensure that the finances of those entering aged care are structured correctly, and residents should seek financial advice before making any financial decisions.
Selling the family home
The differing treatment of cash assets and the principal place of residence will invariably see planners facing resistance from clients around the idea of selling the family home.
This will be true now, more than ever, because it will only have a minimal impact on their client’s co-contribution.
However, as the example above shows, what is missed in this conversation is that unless the client has other assets they could use to pay a RAD, they are likely to pay a significantly high DAP.
It will be imperative for those entering care to seek professional advice to ensure they can afford the cost of aged care.
For instance, it is entirely possible that people moving into care post the aged care reforms will be better off paying their accommodation payments as a RAD in full, upfront.
Smart aged care providers will encourage this with creative incentives offered to residents, which is going to help manage the cash flow problem that many will face as a result of the introduction of the MTF.
The current bonus bond strategy may also still have its application within a provider’s maximum accommodation payment parameters.
There are a number of strategies that need to be considered, depending on the level of assets and income a person has.
Professional advice will be required to ensure the approach taken best maximises cash flow and capital preservation.
The challenging road ahead
There can be no doubt that planning for aged care living will become as complex as planning for retirement and will have as many, if not more, pitfalls, both financial and emotional.
Lack of planning for aged care needs can cost clients unnecessarily. These changes mean that knowing how the rules and regulations affect one’s financial position is as important in planning for aged care as it is for superannuation, and lack of knowledge can come at a huge financial cost.
Financial aspects are not the only issue as, unlike retirement planning, people generally do not want to consider the possibility of aged care, much less to plan for it.
The challenge for financial advisers is to get retired clients to think about the very real possibility they will need aged care in their later years. As Australians live longer, that probability increases.
The question is, though, how involved do you want your business to be in this space? If your business goal is to be able to provide aged care advice in order to secure client retention and the intergenerational transfer of wealth, you may not have, or want, the technical know-how to provide it on your own.
Specialists can partner with you, as the trusted adviser, to provide the best (and right) advice to your clients.
The situation is different to superannuation and retirement savings as clients look forward to retirement and will seek advice. They want to know about their options, and are usually willing to act on advice given.
With aged care planning, clients are less willing to discuss their needs, even with their family. Indeed, they are often in a state of denial. They may expect arrangements to be made with their family that the family isn’t aware of and are not planning for, or they may simply become incompetent to make decisions.
Sensible planning starts a long time before the need, and advisers have a major responsibility, as well as a professional opportunity, to help clients face their needs as they age and understand the options that will be available for them.
An aged care placement service is an essential piece of the aged care puzzle. Companies with expertise in the area can assist advisers and their clients in aged care placement, which is just as important as structuring finances for the move into aged care.
The decision is generally much more complicated than simply deciding on where a person wants to spend the last years of their life.
Apart from anything else, there is an increasing shortage of aged care facilities and it’s not just a case of whether the one that you want is available. There’s every chance that there are no facilities available offering the standard you want or can afford.
Pre-planning can help with this by helping ensure people fully understand the options available to them, and can have put in place the financial strategy to best support them.
It also means they don’t end up having to make a last-minute decision about aged care when their doctor tells them they can no longer stay in their own home.
The aged care reforms are a challenge and an opportunity for financial advisers.
A new approach will be required, and advisers can play a key role in ensuring their clients are structuring their financial affairs in the best way.
Anna Lawton is senior manager, aged care advice at Equity Trustees Limited.
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