How the new means testing rules impact aged care clients using CarePlus | Accurium

How the new means testing rules impact aged care clients using CarePlus

In the August 2018 Challenger Tech article, ‘The strategic implications of new means testing rules for lifetime income streams’, we described the proposed new means test rules that apply to lifetime income streams commenced on or after 1 July 2019. In this month’s article we analyse how these proposed new means test rules, which are subject to the passage of legislation, will affect clients using Challenger CarePlus (CarePlus).

CarePlus

CarePlus is designed for people who have been assessed as being eligible to receive Government-subsidised aged care. It comprises:

  • CarePlus Annuity (Annuity) that provides regular payments for life, and
  • CarePlus Insurance that pays a lump sum to the estate and/or nominated beneficiary(ies).

The Annuity is a lifetime annuity that will be assessed under the proposed new means test rules where CarePlus is purchased on or after 1 July 2019 as described in Table 1 below. Importantly, where CarePlus is purchased before 1 July 2019, grandfathering provisions will apply and the Annuity will continue to be assessed under the current rules.

Table 1: Comparison of current and new means test rules for CarePlus Annuity

  Current rules  New rules
Income Test Regular payment less deduction amount 60% of regular payments
Assets Test Purchase price less (deduction amount x term elapsed 60% of purchase price until age 841 (minimum of 5 years), 30% thereafter 

Note: Deduction amount equals purchase price divided by life expectancy.

For the Income Test, the new rules will assess 60% of payments from the Annuity. For example, where the Annuity pays income of $5,000 p.a., $3,000 p.a. will be assessed under the Income Test.

For the Assets Test, 60% of the purchase price is assessed as an asset until the life expectancy of a 65 year old male (currently age 84) or for a minimum of five years. After this the assessment reduces to 30% of the purchase price. The minimum period of five years will mean the 30% assessment cannot be accessed immediately. In most cases, 60% of the purchase price will be assessed for the minimum five year period, based on the average age of CarePlus investors being 882 for the 2017-18 financial year.

For CarePlus Insurance, there is no change to the assessment and the termination value remains assessable under the Assets Test. To demonstrate how these proposed means test rules apply to CarePlus, consider the following examples.

Income tested example

Jane is 87, single and widowed. The residential aged care home she is considering has an advertised accommodation payment of $350,000. To fund this agreed amount, she has sold her home and paid a Refundable Accommodation Deposit (RAD) of $350,000. She now has $300,000 in term deposits, $50,000 in cash, $5,000 personal contents and wants to explore other strategies for this money. She would like to be able to pay for her aged care fees and $5,000 p.a. of other ongoing living expenses.

Her adviser compares retaining $50,000 in cash and $300,000 in term deposits with two alternate strategies which replace the term deposit with an investment bond in a trust or CarePlus as shown in Table 2.

Table 2: Cash flow and estate planning outcomes for year one

  $50,000 bank account $300,000 term deposits $50,000 bank account $300,000 investment bond in a trust  $50,000 bank account $300,000 CarePlus (pre 1 July 2019)  $50,000 bank account $300,000 CarePlus (from 1 July 2019) 
Age Pension  $20,530
$23,598  $23,326  $22,726
Investment income $10,500  $1,500  $1,500  $1,500 
CarePlus income  $0  $0
$8,899  $8,899 
Living expenses -$5,000  -$5,000  -$5,000  -$5,000
Cash flow before aged care fees  $26,030  $20,098  $28,725
$28,125 
Basic daily care fee
$18,308  $18,308  $18,308  $18,308 
Means-tested care fee
$10,019
$8,515  $7,767  $7,862 
Total aged care fees  $28,327
$26,823
$26,075  $26,170 
After-tax cash flow (surplus/shortfall)
-$2,297  -$6,725
$2,650  $1,955
End of year 1 estate value
$702,557
$704,449  $707,525  $706,830 

Assumptions: Results from the Challenger Aged Care Calculator as at 3 September 2018. Assumes bank account and term deposit earning rate of 3.0% p.a., no withdrawal from the investment bond earning 3.0% p.a. less tax of 30%, Challenger CarePlus based on a female (date of birth 01/07/1931), residing in NSW, monthly payments and no adviser fees. The estate value includes the RAD of $350,000, with any cash flow deficit being funded from the bank account, excludes any term deposit break fees and includes proceeds from CarePlus. CarePlus (from 1 July 2019) based on proposed means-test rules for a lifetime annuity based on rates and thresholds currently available

For income tested clients, comparing CarePlus, term deposit, and investment bond in a trust strategies, has generated increased Age Pension entitlements, a reduction in means-tested care fee and an increased benefit to the estate even where it is purchased after 1 July 2019 as shown in Chart 1. 

Chart 1: Projected estate value upon death over 10 years

How the means testing rules impacr aged care clients using CarePlus 3

Asset tested example

Violet is 87, single and has also entered residential aged care with an agreed accommodation payment of $350,000. To fund this agreed amount, she has sold her home and paid a RAD of $350,000. She now has $600,000 in term deposits, $50,000 in cash, $5,000 personal contents and $5,000 in living expenses. Violet would like to afford her ongoing aged care fees and improve her ongoing cash flow.

Her adviser compares retaining $50,000 in cash and $600,000 in term deposits with two alternate strategies which replace the term deposit with an investment bond in a trust or CarePlus as shown in Table 3.

Table 3: Cash flow and estate planning outcomes for year one

$50,000 bank account $600,000 term deposits $50,000 bank account $600,000 investment bond in a trust $50,000 bank account $600,000 CarePlus (pre 1 July 2019) $50,000 bank account $600,000 CarePlus (from 1 July 2019)
Age Pension $8,817
$8,583 $15,427 $17,064
Investment income $19,500 $1,500 $1,500 $1,500
CarePlus income $0 $0
$17,798 $17,798
Living expenses -$5,000 -$5,000 -$5,000 -$5,000
Cash flow before aged care fees $23,317 $5,083 $29,725
$31,362
Basic daily care fee
$18,308 $18,308 $18,308 $18,308
Means-tested care fee
$15,053
$14,564 $12,801 $12,658
Total aged care fees $33,361
$32,872
$31,109 $30,966
After-tax cash flow (surplus/shortfall)
-$10,044 -$27,789
-$1,384 $396
End of year 1 estate value
$994,831
$989,686 $1,003,491 $1,005,271

For asset tested clients, comparing CarePlus, term deposit, and investment bond in a trust strategies, has generated increased Age Pension entitlements, a reduction in means-tested care fee and an increased benefit to the estate even where it is purchased from 1 July 2019 as shown in Chart 2.

Chart 2: Projected estate value upon death over 10 years.

How the means testing rules impacr aged care clients using CarePlus 5

In summary, CarePlus continues to provide security of regular payments for life, certainty and control over the estate planning process and efficient interaction with social security and aged care rules after 1 July 2019.

For more information on the proposed means test treatment of lifetime income streams and additional aged care related content, please visit AdviserOnline or contact the Challenger Tech team on 1800 176 486 or email challengertech@challenger.com.au


1Age 84 is based on the current life expectancy of a 65 year old male

2Average age of investors who purchased CarePlus during financial year 2017-18 was 87.86.

 

The information contained in this update is current as at 20 September 2018 unless otherwise specified and is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger), the issuer of Challenger annuities (Annuity(ies)). It is intended solely for licensed financial advisers and this update must not be passed on to retail clients. The examples shown are for illustrative purposes only and are not a prediction or guarantee of any particular outcome. This information is not intended to be financial product advice and has been prepared without taking into account any person’s objectives, financial situation or needs. Each person should, therefore, consider its appropriateness having regard to these matters and the information in the product disclosure statement (PDS) for the applicable Annuity before deciding whether to acquire or continue to hold an Annuity. A copy of the PDS is available at www.challenger.com.au or by contacting our Adviser Services Team on 1800 621 009. This document may include statements of opinion, forward looking statements, forecasts or predictions based on current expectations about future events and results. Actual results may be materially different from those shown. This is because outcomes reflect the assumptions made and may be affected by known or unknown risks and uncertainties that are not able to be presently identified. Neither Challenger nor its related bodies corporate nor any of their employees receive any specific remuneration for any advice provided in respect of the Annuity. Some or all of Challenger group companies and their directors may benefit from fees and other benefits received by another group company. Any taxation, Centrelink and/or Department of Veterans’ Affairs illustrations are based on current law at the time of writing which may change at a future date. Neither Challenger, nor any of its officers or employees, is a registered tax (financial) adviser under the Tax Agent Service Act and it is not licensed or authorised to provide tax or social security advice. Before acting, we strongly recommend that prospective investors obtain financial product advice, as well as taxation and applicable social security advice from a professional and registered tax agent who can take into account the investor’s individual circumstances.