A few months ago I wrote to Jennifer about the importance of communication when it comes to money. The more conversations you have about money before you have to make major financial decisions, the greater the clarity and the happier you will be.
Well here is another opportunity to either commence or continue the conversation when it comes to your care needs. Governments around the world have a very challenging situation to deal with – an ageing population.
The Government knows that almost seven out of every 10 women will require aged care during their lifetime, and that on average women have a longer life expectancy. Moreover, more than four people out of every 10 live alone after age 65, which increases the need for external support.
The cost to care for someone in a residential facility can be up to $80,000 pa or thereabouts. A large part of this is funded by the Government and they recognise it is not sustainable. So, if you are moving into care from 1 July 2014, then you will be subject to a new fee structure, which is likely to cost more for care and accommodation.
A quick comparison of the current and new fee structures, as well as the purpose of the fee, is shown below.
The good news is that the basic daily fee remains unchanged and is set at 85 per cent of the single age pension.
A major change is that there will be no distinction between ‘low care’ and ‘high care’. To create greater transparency, all subsidised age care facilities will be required to publish their accommodation rates for entry as both a lump sum and daily fee. One of the criticisms of the current system is that the entry fee is based on a negotiation process influenced by your level of assets. In other words, the more assets you have, the more you may pay as an entry fee (bond). The new structure will make the comparison of the accommodation payments between facilities easier.
Under the current rules, your assets are used to determine how much you pay for accommodation and your income is used to determine how much you pay for ongoing care (income-tested fee).
The new rules require a more complicated calculation, termed a ‘means – tested amount’ which considers your income AND assets. If the total calculated is less than the new threshold (termed the maximum accommodation subsidy (MAS)) you only need to contribute towards accommodation and basic daily care fees. But if the total is higher than the MAS, higher care fees are payable (the additional daily care fee).
In that regard, there will be less (if any) planning opportunities, such as to negotiate higher bonds to reduce daily care fees.
One benefit of the new rules is that there is a lifetime cap of $60,000 for the additional daily care fees, while the current rules have no cap. To put that into perspective, the current average income tested fee is $5,000 pa and so you would break even if you were in the age care facility for more than 12 years. Of course, this means that 50 per cent of people pay more than $5,000 pa and 50 per cent pay less.
Finally, the new rules will no longer allow a facility to deduct a monthly retention amount from the accommodation amounts paid.
Let’s consider an example.
Margaret is a widow with $300,000 in cash and a $600,000 home.
If she elects to move into a facility before 1 July 2014 with an entry fee of $250,000, which is paid in full from her available cash, her care fee would be limited to the basic daily fee of $16,973 per annum and she would receive the full age pension of $21,913 per annum.
If Margaret defers her entry until after 1 July 2014, and assuming the facility has an advertised accommodation payment of $250,000, her care fee will increase to $20,893 per annum. Although she continues to receive the full Age Pension, she will have $3,920 per annum less to provide for her lifestyle needs.
Making an informed decision will require a series of calculations and comparisons of various options, including whether to sell or keep the house. Selling the house may improve cash flow and simplify the management of your investments but it may also increase the fees payable.
While the reforms introduce some more flexibility and transparency, it is likely that aged care fees will be higher for those entering on or after 1 July 2014 when compared to a resident in similar circumstances who entered before that date.
But remember, it is not just about the fee – accessing the right level of care in the right location may be more important.
The impending changes mean now is the time to start thinking about your options.
I encourage you to seek professional advice to reduce the stress which is often associated with aged care conversations. Moreover, decisions may be best solved as a family, so hold a family meeting and talk with close family members.