Whether it’s 5 years or 15 years away, for you or your parents, planning now for how you and your family will approach aged care will have a lot to do with how legislation affects you, the impact on your finances and the type of care you can afford. There are several strategies you need to consider, and it’s important to understand that after someone has entered aged care, it may be too late to undo any financial decisions they — or someone on their behalf — made before they went in.

It can be one of the harsher sides of life that someone who’s fit and well today, may need to live in an aged care facility in the future. Indeed, as Baby Boomers in particular grow older, aged care is a “growth industry” that’s only likely to get bigger.

But in the past decade, aged care has become increasingly complex. Numerous changes to government policy regarding aged care means seeking specialist financial advice could be helpful in understanding the legislative issues.

Seeking an adviser familiar with the area will also help in understanding the types of facilities available, resident costs and financial-planning considerations such as the impact on a Centrelink or Department of Veterans’ Affairs pension, retaining the family home and estate planning.

Placing a parent in aged care is fraught with emotion, and will probably be distressing for everyone. Seeking specialist advice early removes the added stress of last-minute, hasty decisions, which may not be the right ones for your parents, or you.

How to work with your adviser

Whether for you or your parents, your adviser will need specific information so they can work out the best plan — for example, the level of care required and whether or not you want to keep the family home. This isn’t always just a financial decision; if someone has lived in the home or area for a while, the memories and feelings associated with it might weigh more heavily as a factor.

Your adviser will also need to know if person going into aged care has a legal representative, and they’ll probably also want to understand some of the family dynamics and relationships. As always, the more information, the more tailored the advice.

Generally, advice for aged care clients includes some alternatives for the person and/or their family to consider. The advice will often centre around generating income to meet ongoing aged care costs and estate planning issues.

How does the process begin?

The trigger for moving to an aged care facility is usually either a gradual health deterioration or sudden health-related issue (such as a mobility-limiting fall). 

A GP then identifies the need for “supported living”, requesting an Aged Care Assessment Team (ACAT) to determine the level of care needed — either low care (hostel) or high care (nursing home).

How are costs calculated?

For a new resident, costs are calculated using the assessment rules and rates current at the time of entry to aged care.

However, for existing residents, ongoing costs can vary, depending on the date they entered the aged care facility. For instance, it’s important to determine whether an “accommodation bond” or “accommodation charge” was paid, and what ongoing costs are applicable.

Some existing aged care residents are paying fees based on assessments before 20 March 2008, when the Federal Government implemented major reforms. Following announcements in the May 2009 Federal Budget, more changes began on 20 September 2009, which will be discussed below. 

(For more information on aged care issues, you may also wish to check the Department of Health and Ageing http://www.health.gov.au/internet/main/publishing.nsf/Content/ageing-whatnew.htm)

Types of aged care facilities

There are 2 types of aged care facilities: hostels (low care) and nursing homes (high care). Both are government subsidised, although residents may also have to contribute.

1. Hostels

The upfront payment is an “accommodation bond”, which is negotiable between the resident and the facility.

There’s no limit on the bond amount, which is generally determined by the resident’s assets at the time they enter the facility, but the resident must be left with no less than $36,000 in assets.

The bond can be paid as a lump sum, via periodic (fortnightly or monthly) payments, or as a combination. Where it’s paid partially as a periodic payment, an interest charge can be applied at a statutory rate (currently 7.3%).

Post-reform residents can pay an income-tested fee according to pensioner status:

• full pensioners are exempt
• the maximum amount of the income-tested fee is equal to 5/12 of the resident’s total assessable income above a threshold level

2. Nursing home

The upfront payment is an “accommodation charge”, which again is negotiable between the resident and the facility, but doesn’t apply if assets are less than $36,000. By agreement, payment can be deferred (but interest is charged) or paid from the resident’s estate.

For post-reform residents, the accommodation charge is based on their pensioner status and assets at entry. From 20 September 2009, both pensioner (supported) and non-pensioner (non-supported) rates are the same:

• supported and non-supported, with assets of $91,910.40 or higher = $26.88 per day
• partially supported, with assets equal to or less than $91,910.40 = $25.02 per day.

Residents who move from a hostel where they have paid an accommodation bond may be able to transfer it when they move to a nursing home, instead of also paying the accommodation charge. (The nursing home would need to be approve this.)

Extra service facilities may mean an accommodation bond is paid instead of an accommodation charge.

Rent won’t be assessed under the income test for residents renting their home while paying or deferring the accommodation charge. Neither will the home’s value be assessable under the assets test while this situation continues.

If the accommodation charge is not payable, the rent will be assessable under the income test (under the normal provisions) and the former home will only be an exempt asset for two years.

Post-reform residents pay a basic daily fee at a rate of 84% (from 20 September 2009) of the single age pension. They can pay an income-tested fee according to their pensioner status:

• full pensioners are exempt
• the maximum amount of the income tested fee is equal to 5/12 of the resident’s total assessable income above a threshold level

While the government sets the minimum charges that will apply — depending on the care level — many aged care providers who offer “extra service facilities” may charge an accommodation bond for a high-care resident instead of the accommodation charge. The aged care provider usually bases this bond on a commercial value, however, there are no set limits or formulae for calculating it.

Other ongoing fees

As well as the accommodation bond or charge, other ongoing fees can also apply, depending on the resident’s means-tested income and type of aged care facility services provided.

1. Basic daily fee

All residents in an aged care facility pay this, which contributes to the costs of meals, laundry and “comfort”, including general areas of daily care. For residents who entered care before 20 March 2009, a higher basic daily fee can apply than for those residents who entered after this date when the fee was capped at 85% of the full single pension. From 20 September 2009, this cap has been reduced to 84% of the full pension, which is subject to change (see details below).

2. Income-tested fee

This is similar to a co-contribution by the resident, and covers care costs where the resident is income means tested. Centrelink or the Department of Veteran Affairs (depending on the pension source) does this assessment when a resident enters an aged care facility permanently. The threshold for this fee from 20 September 2009 is $783.70 a fortnight (or $20,376.20pa) for a single person, or $765.70 per fortnight for a member of a couple.

Income earned above this threshold is calculated at 5/12th of the total assessable income. Income-tested fees are capped, based on whether or not the resident is a pensioner and cannot exceed the cost of their care.

3. Extra service fee

Some aged care facilities provide extra services, such as improved in-room services, and/or services across the whole facility. This fee is generally an extra daily charge; it varies from facility to facility. (For more information on charges as of 1 January 2010, visit http://www.health.gov.au/internet/main/publishing.nsf/Content/ageing-finance-resfees.htm)

May 2009 Budget changes 

Changes to pensions in the 2009/10 Federal Budget will also affect payments regarding aged care facilities.

In that Budget, the government announced it would increase the maximum single age pension by $32.49 per week from 20 September 2009, on top of the normal indexation increases; while the single basic age pension was increased $30 a week to $305.15 (indexed).

A new supplement was created by rolling the GST supplement, the pharmaceutical allowance and the utilities and telephone allowances into a single pension supplement. This also increased on 20 September 2009 by $2.49 per week (on top of normal indexation), to $27.88 (indexed).

As a result of all this, the new single pensioner rate (including supplement) is $335.95 a week.

The government also lowered the maximum rate of the basic daily aged care fee to 84% of the new higher single age pension. From 20 September 2009, the maximum basic daily fee is $36.94 a day, or $258.58 a week (indexed).

New ‘grandfathering’ arrangements

Special arrangements have been put in place for self-funded retirees who do not benefit from the pension rise and for part-pensioners whose increase is less than $22.40 a week (the rise in the basic daily fee). 

1. For those in care before 19 Sept 2009:

This doesn’t include all part-pensioners, because self-funded retirees and part-pensioners who receive an increase worth less than $22.40 a week on 20 September 2009, and who were in care on 19 September, had their basic daily fee set at the pre-20 September level of $33.41 a day or $233.87 per week (indexed). This is equivalent to 77% of the new single basic age pension. For these residents, the level of their basic daily fee remained at this level (indexed), while they remain in care.

2. For those in care after 19 Sept 2009:

Self-funded retirees and part-pensioners who received a pension increase worth less than $22.40 a week on 20 September 2009, and who entered care after 19 September 2009, will have the level of their basic daily fee increased 1% every 6 months from 20 September 2009 to 20 March 2013.

Entering care in the transition period

The government paid a new supplement to aged care providers for residents who entered care after 19 September 2009, and whose maximum basic daily fee is less than 84% of the single basic age pension. This means providers will receive the same income for these residents as they do for those who pay the full basic daily fee.

The value of the supplement was equal to the difference between the total daily fee (basic daily fee and income-tested fee) that the resident would have paid if the transition arrangements hadn’t been in place, and the total daily fee that the resident will pay.

Let’s work through an example.

Calculating the basic daily fee from 20 September 2009: 

Post-20 Sept 2009 fortnightly single pension = $671.90

Less pension supplement of $55.76*

Giving a net pension for calculation of $616.14 

Multiply this by 84% = $517.56

So the basic daily fee (divide by 14) = $36.94 

(* this comprises GST $19.50 + utilities allowance $19.96 + telephone allowance $5.32 = pharmaceutical allowance $6 + Budget allowance $4.98)

It is also important to note that following the Budget announcements, residents entering care from 1 January 2010  will no longer enjoy a 28-day grace period before income-tested fees apply. This will align the residential income-tested fee with other aged care fees payable from the date of entry into the facility.

What will not change is that a resident who is a homeowner has a two-year exemption period from the date of entry into aged care before their previous home is counted for the purposes of a means-tested Centrelink or Department of Veterans’ Affairs pension.

Aged care strategies

Aged care is an increasingly complex area financially. In many cases, an aged care resident has to decide whether or not to sell the family home and this may not be a simple financial decision. For an elderly person who has lived in the same home or area for many years, there may be a psychological attachment and a belief that one day they will resume living in the home.

Some people may prefer to pay a part-accommodation bond and retain the family home, even though they may need to rent it for some time to retain the means-test exemption.

If the resident-to-be holds financial assets that will not be exempt, they may need to consider strategies to reduce deemed or other income. By reducing these assets, and therefore income, it may be possible to maintain the level of government pension they are receiving and reduce any income-tested fee payable, should income be in excess of the threshold.

Many prospective residents and their families believe that they must accept the aged care cost arrangements in the terms outlined by the aged care facility. This is not always so, as you can often negotiate the method and timing of payment with the aged care facility. But, where an accommodation bond applies, a penalty interest charge is usually payable at the rate of 7.30% a year (effective 20 September 2009) over a 5-year period.

Bear in mind, aged care is a growth industry with demand outstripping supply in many areas.

It’s important to understand that after a resident has entered aged care, it may be too late to undo any financial decisions made by them, or on behalf of them, before entry.

As per above, for more information on aged care issues, you may also wish to check the Department of Health and Ageing http://www.health.gov.au/internet/main/publishing.nsf/Content/ageing-whatnew.htm and for charges as of 1 January 2010, visit http://www.health.gov.au/internet/main/publishing.nsf/Content/ageing-finance-resfees.htm

Source: “Aged care advice” by Kaplan Education Pty Limited, November 2009.