As of 1 July 2014, new reforms will be introduced in the growing aged care sector. Craig Meldrum, head of financial advice at Australian Unity, takes a closer look at the implications for financial advisers and the importance of being ready for the changes.
There is no question about it—aged care is complex. It can be a minefield for prospective residents and their families to navigate. While quality advice is critical—ensuring not only the best financial outcome for residents, but also that the resident can secure a spot in a facility they and their families are happy with—it is a difficult area of financial advice and one not many advisers are comfortable with.
A growing need
I regularly hear the question from advisers, ‘Do I need to look more at aged care?’ Well, it’s not going away. There are roughly 168,000 aged care residents in Australia at present(1) and according to the Department of Health and Ageing, there are an estimated one million people that receive government-subsidised aged care services (expected to grow to 3.5 million by 2050). It is estimated that the number of people over the age of 70 will grow from roughly two million to eight million between 2011 and 2051, at a rate of about 60,000 per annum(2). People will absolutely need quality advice going forward, with significant changes occurring this year making the sector more and more complex. The fact that it takes many hours for experienced, financially literate people to understand the implications in the current environment, let alone in the new regime, highlights how challenging it will be for an elderly client having to make decisions—especially if they have not made prior plans and discussed them with family.
Advisers need to be up to speed with a raft of aged care and Centrelink rules, which can include the aged care act, the social security act, veterans’ entitlements act and the overlay of taxation, superannuation, and retirement income streams.
"It is estimated that the number of people over the age of 70 will grow from roughly two million to eight million between 2011 and 2051."
More than just numbers
It’s important to keep in mind, however, that aged care is not a purely technical prospect. First and foremost it is an emotional and psychological dilemma. In my experience, the rule of thumb when dealing with families in emotional situations like the decisions encompassing aged care is that no-one agrees on anything—from the standard of the facility through to geographic location or the standard of care. Financial planners often say they feel more like a counsellor during the early phase until strategies start to develop, concessions are made, a consensus is reached and decisions are confirmed.
In terms of the financial strategies employed to best assist prospective residents, there is certainly no ‘one-size-fits-all’ solution. Sometimes it takes a comparison of a multitude of strategies before a consensus is reached. One of the difficulties we find is that decisions made by family members can be in their own best interest and have little to do with what’s best for the vulnerable prospective resident. The Best Interest obligation under FoFA benefits that elderly person, which certainly helps define what an adviser’s approach needs to be when formulating a recommended strategy.
A new approach
The Living Longer Living Better aged care reforms, which were announced in April 2012 and begin 1 July 2014, are the previous Government’s response to the work of the Productivity Commission and the National Aged Care Alliance’s Blueprint to build a better, fairer and more nationally consistent aged care system.
It is hoped the reforms will encourage greater investment in the sector and improve the sustainability of the aged care system.Most financial advisers are aware to some degree of the basics of high-care and low-care, aged care bonds, daily care fees, accommodation charges and the dreaded income-tested fee. The current system has generally tied the person’s assets to the cost of accommodation and their income to the cost of ongoing care. Most advisers are also aware of the basic strategies that have helped residents maximise their aged pension entitlements and reduce the ongoing costs of care, such as negotiating a higher bond amount (which has always been asset-test exempt); investing in an insurance bond in a private trust (which has worked to reduce income); or paying a portion of the bond by periodical payments (which means that the principal residence, once rented out, remains asset-test exempt and yields income-test exempt rental income).
The reforms, however, have thrown a lot of this up in the air. Instead of lump sum bonds we now have RADs (refundable accommodation deposits), and where bond amounts were paid by periodic payments we now have DAPs (daily accommodation payments). The new system has removed the distinction between low care hostels and high care nursing homes, meaning all residents will be subject to the same fee structure. The new rules also combine the resident’s asset and income position and apply a broader means-tested amount to replace the income-tested fee. Another big change is that the previous asset-test exempt bond, now a RAD, will count as an asset, but only the first $153,905(3) of the principal residence will be taken into account and included as an asset. This does at least provide some planning opportunities.
Providers will also be required to disclose their accommodation prices on the My Aged Care website (www.myagedcare.gov.au), which will provide some visibility across all aged care facilities and allow prospective residents to more easily compare prices.
It is important to note that existing residents will be grandfathered under the current rules. The new rules will apply to individuals who enter residential aged care on or after 1 July 2014 (existing residents will be subject to the new rules if they leave care and later re-enter or change facilities, with some conditions).
So what’s the answer?
As we approach 30 June, I’m being asked more and more often whether residents will be better off under the new rules or whether they should bring forward their plans to move to an aged care facility.
There was a lot of noise made about the capping of fees with an annual indexed cap of $25,000 per annum (as at 20 March 2012) and a lifetime indexed cap of $60,000 applying to the means-tested fee(4). But in all the scenarios I’ve compared between application of the income-tested fee under the current rules and the application of the means-tested fee post-30 June 2014, the cost of care will generally be more expensive for residents under the new regime. It is critical that advisers working with their elderly clients and families fully model the financial implications under both regimes in order to make the best recommendations.
The current set of strategies available to financial planners will also change significantly, and it is inherent on all financial planners advising in aged care to understand the extent of the changes to achieve the best outcomes for prospective residents. By way of example, the fact that only a portion of the principal residence will be assessed (if not occupied by a protected person) will provide some opportunities to reduce the means-tested fee if the principal residence is retained.
I believe financial planners can add extraordinary value to their elderly clients’ lives by assisting them with guidance, education and strategy in picking their way through the plethora of aged care options, ensuring they and their families are financially and emotionally secure with the decisions that need to be made.
1. AIHW 2011. Residential aged care in Australia 2009-10: a statistical overview. Aged care statistics series no. 35. Cat. no. AGE 66. Canberra: AIHW. Viewed 11 February 2014. (http://www.aihw.gov.au/publication-detail/?id=10737419861)
2. Australian Govt. Productivity Commission – An Ageing Australia: Preparing for the future, November 2013
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