Aged Care Funding Changes: It Can Pay to Pay Big

Changes to pension means testing that took effect on January 1 have changed the financial dynamics of both pensions and aged care in Australia. They are the biggest changes to means testing we have seen in a decade. Perhaps a little like fashion, where if you wait long enough flares come back in, this new asset test is the same one that was abolished in 2007.

The Government argued media hype was unwarranted because only about 236,000 people would lose some (or all) their pension.

The reality is that the new asset test is not a snapshot in time — so a change of circumstances, typically downsizing your home, will affect significant numbers of pensioners.

It will just take time for many others to feel effects.

The biggest downsize comes when someone moves into aged care. This downsize is often physical, moving from a three-bedroom home or a two-bedroom apartment to a single room or a suite, as well as financial — the amount they are paying for their aged care accommodation is less than what they are selling their home for.

You see, the rate at which the pension reduces when you go over the asset test threshold is $3 for each thousand dollars of assets per fortnight — another way of looking is that the assets over the threshold need to produce 7.8 per cent to replace the pension you are losing.

Couple this with the fact that the money held in investments is not only an assessable asset for pension and aged care purposes, but also deemed to earn income, and you have a double whammy.

Your pension goes down and your cost of care goes up.

In the tables running with this report, we show two options facing a retiree Shirley, who currently lives in her home valued around $900,000 and has modest other assets valued a bit over $75,000. Shirley is considering moving to an aged care facility. The facility has two rooms available, a smaller room on first floor with a market price of $350,000 and a luxury suite on the 5th floor with a market price of $850,000. The larger room could well be far more financially attractive for Shirley.

The numbers in the tables show the luxury suite has given Shirley an annual benefit of $14,562 a year. As a rate of return, this saving on the extra $500,000 she has paid is equivalent to about 2.9 per cent.

But this is not a mere financial investment — it is an investment in Shirley’s lifestyle. The higher price gives her a nicer room, a better view or a better location, or maybe a combination of these benefits.

In addition, money she has paid to the facility (known as a Refundable Accommodation Deposit or RAD) will be refunded to Shirley or her estate shortly after she leaves, with her capital being guaranteed by the government.

The point is that many people considering care for themselves or a loved one can make assumptions about what is “affordable”.

Shirley’s Assets and Selling the Family Home

As described in the article paying for a larger RAD increases the pension received and reduces the Means Tested Care Fee (MTCF). The annual saving to Shirley is $14,562 being a pension increase of $13,806 and reduction in the MTCF of $756.

When you work through the numbers, there is a cashflow saving of purchasing the more expensive room of $4,562 per year. It indeed does pay to pay big!

Shirley’s Assets and Using an Aged Care Loan

Sometimes selling the family home is not an option. If Shirley and the family decide to keep the family home they could use an aged care loan to pay for the cost of the room.

If we repeat the two scenarios outlined in the article but instead use an aged care loan we produce scenarios 3 and 4. Financially paying the larger RAD and having a better quality room can stack up as can be seen below.

Keeping the home Shirley and family see substantial savings in annual cashflow due to an increased pension and a much lower means tested care fee. In scenario 4 the means tested care fee is higher due to the higher RAD and the DAP is deducted from the RAD to ease the cashflow burden. Interest accrues on the aged care loan and whilst this has no cashflow impact it should be considered under the overall scenario. If selling the home is not an option, as can be seen, an aged care loan works well with both small and large RADs.

Co-authored by Rachel Lane from Aged Care Gurus and Martin Barry, Head of Aged Care Loans at La Trobe Financial.