The Challenger Tech team has recently been presenting on aged care at various events including the Association of Financial Advisers ‘National Adviser Conference’, International Business Review ‘Post Retirement Australia Conference’ and Financial Observer ‘Aged Care Summit’. In this month’s article we answer some of the questions asked by advisers regarding residential aged care during those events.
Why is financial advice important for clients entering residential aged care?
Most clients are not prepared for entry into residential aged care because it is typically not considered until there is an immediate requirement. It is difficult to plan for residential aged care because the need for aged care generally cannot be predicted and often is the result of an unexpected incident such as a stroke or fall. The aged care system is also under regular review and subject to reform therefore the rules are constantly changing.
The complexity of the aged care system combined with the emotions of requiring residential aged care can lead to seemingly irrational behaviour from family which can result in negative financial outcomes. Family may also be in conflict over different preferences for aged care, negative perceptions of aged care or be suspicious of each other’s motives.
Financial advice can help clients to achieve their personal and financial objectives when they enter residential aged care. Family is often involved in the process therefore mediation is important particularly where clients have lost mental capacity and are unable to make their own decisions. It can be beneficial to hold family meetings so everyone has the same information, understands the objectives, discusses the issues and resolves any differences.
What are the funding options for residential aged care costs?
The maximum advertised accommodation price is $550,0001 unless the aged care facility seeks approval from the Aged Care Pricing Commissioner to charge more.
The costs for residential aged care are separated into accommodation payments and ongoing care fees. Accommodation payments are determined by the advertised accommodation price and the client’s means at entry into residential aged care. The maximum advertised accommodation price is $550,0001 unless the aged care facility seeks approval from the Aged Care Pricing Commissioner to charge more. Ongoing care fees are determined by the client’s means reassessed quarterly and any extra or additional services.
Accommodation can be paid as a lump sum, a daily payment or a combination of lump sum and daily payment. Where accommodation is paid as a daily payment, the client is effectively borrowing from the aged care facility at the maximum permissible interest rate (currently 5.96%1). The client will have 28 days to decide on their payment method after they move into the aged care facility.
Where the client has liquid assets which are likely to earn less than the maximum permissible interest rate, they should consider selling down assets to pay for their accommodation as a lump sum. Where the client has paid for part of their accommodation as a lump sum and they have insufficient cash flow, they can have their daily payment deducted from their lump sum. Over time, this will reduce the amount of lump sum refunded to the client’s estate in the event of their death. This will also increase their daily payment over time as their outstanding lump sum increases.
Depending on the client’s means at entry into residential aged care, they may be classified as a ‘low-means’ resident and the Government will subsidise all or part of their accommodation payment. ‘Low-means’ residents may have to pay an accommodation contribution determined by their means reassessed quarterly.
For further information on funding accommodation payments, see April 2018 Challenger Tech article 'Six strategies to fund accommodation costs'.
Ongoing care fees include the basic daily care fee, means-tested care fee and extra or additional services fees which are generally paid monthly to the aged care facility. The basic daily care fee is capped at 85% of the single basic rate of Age Pension and is indexed half yearly. The means-tested care fee is determined by the client’s means reassessed quarterly. The extra or additional services fees are determined by the aged care facility.
Where the client has liquid assets which do not provide sufficient cash flow, they could consider investment products which provide regular income to pay for their ongoing care fees. Where the client has paid for their accommodation as a lump sum and they have insufficient cash flow, they can ask for their ongoing care fees to be deducted from their lump sum. Over time, this will reduce the amount of lump sum refunded to the client’s estate in the event of their death. This will also create an outstanding lump sum accommodation payment and subsequently the client will start paying a daily accommodation payment.
How can decisions about the former home impact cash flow for clients in residential aged care?
Centrelink entitlements and ongoing care fees make up a significant component of cash flow for residential aged care clients. 87% of clients in residential aged care receive Centrelink entitlements2 and 53% of clients pay a means-tested care fee towards their ongoing care3. The decision to keep or sell the former home can have cash flow implications because of the assessment for Centrelink and aged care purposes after entry into residential aged care.
87% of clients in residential aged care receive Centrelink entitlements2 and 53% of clients pay a means-tested care fee towards their ongoing care3.
For Centrelink purposes, the former home is automatically exempt under the Assets Test for two years from the date the client leaves the home4. For aged care purposes the asset value of the former home is exempt where the home is occupied by a protected person5. Where the former home is not occupied by a protected person, the home is assessed up to the home exemption cap (currently $166,7076). For Centrelink and aged care purposes, where the former home is rented, the rental income is immediately assessed.
Clients who keep their former home must consider the Centrelink implications when the home is no longer exempt under the Assets Test two years after they leave the home. The client will become assessed as a non-homeowner and the net market value of the former home will be immediately assessed. There can be a reduction in Centrelink entitlements if the net market value of the former home is more than the difference between the homeowner and non-homeowner Assets Test thresholds (currently $207,0006).
Clients who initially keep their former home and subsequently sell the home must consider the Centrelink and aged care implications of the sale. For Centrelink purposes, the sale proceeds will be immediately assessed and the client will become assessed as a non-homeowner. Clients often sell their former home to pay for their accommodation as a lump sum which is exempt for Centrelink purposes. There can be a reduction in Centrelink entitlements if the sale proceeds are significantly more than the lump sum accommodation payment. For aged care purposes, the sale proceeds will be immediately assessed even where they are used to pay for their accommodation as a lump sum. There can be an increase in ongoing care fees if the sales proceeds are more than the home exemption cap.
For further information on the assessment of the former home, see October 2018 Challenger Tech article ‘How is the family home assessed for my aged care client’.
How does Challenger CarePlus improve financial outcomes for clients in residential aged care?
Challenger CarePlus is a combined lifetime annuity and life insurance policy which can only be purchased by clients who have received approval from the Aged Care Assessment Team or Aged Care Assessment Service. The lifetime annuity provides regular guaranteed income to pay for ongoing care fees and the life insurance policy provides a guaranteed sum insured payable to the client’s nominated beneficiaries or estate in the event of their death.
Where the client has insufficient cash flow to fund ongoing care fees and personal expenses, an investment in Challenger CarePlus can provide regular guaranteed income. Where the client wants to ensure particular beneficiaries receive their entitlements, Challenger CarePlus provides the ability to pay the guaranteed sum insured directly to nominated beneficiaries following the death of the client.
Challenger CarePlus can also work effectively with Centrelink and aged care means testing to reduce assessable income and assets. The lifetime annuity receives a deduction amount which immediately reduces assessable income and over time reduces assessable assets. The deduction amount is the purchase price of the lifetime annuity divided by the client’s life expectancy at commencement. The life insurance policy produces no assessable income and immediately reduces assessable assets by assessing the surrender value. The surrender value is the sum insured of the life insurance policy discounted over the client’s remaining life expectancy.
Where the client is not receiving the maximum rate of Age Pension and is paying the means-tested care fee, Challenger CarePlus can reduce assessable income and assets. Where the client is classified as a ‘low-means’ resident and is paying an accommodation contribution, Challenger CarePlus can also reduce assessable income and assets.
For more information on residential aged care, please visit AdviserOnline or contact the Challenger Tech team on 1800 176 486 or email email@example.com.
1Thresholds as at 20 September 2018
2Australian Institute of Health and Welfare – Residential Aged Care and Home Care 2013-14
3Aged Care Financing Authority – Report on Access to Care for Supported Residents January 2017
4For couples, the 2 year exemption commences from when the last member of the couple leaves the former home
5Spouse or dependent child, carer eligible for an income support payment living in the former home for the past 2 years or close relative eligible for an income support payment living in the former home for the past 5 years
6Thresholds as at 20 September 2018
The information contained in this update is current as at 22 November 2018 unless otherwise specified and is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger), the issuer of Challenger CarePlus (the Annuity). 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.