Aged care, Retirement villages and the Family home

Financial Adviser's picture
Australia’s ageing population means that more retirees will be faced with the prospect of moving into aged care accommodation. For many, this can be challenging, as there are a range of factors to consider, from the cost of aged care to whether to sell their family home, and how this will impact on their social security entitlements. Financial advisers can help alleviate client stress during this difficult time by clearly explaining the fees and charges involved upon entry into aged care accommodation, and how the decision to sell or retain the family home can affect their future financial circumstances.
 
For couples moving into aged care accommodation, timing their move separately can allow them to take advantage of the exemption that applies when a spouse remains living in the former family home. It can also mean they are eligible to receive higher rates of pension, as each member of the couple would be entitled to receive the maximum single rate of age pension while still being assessed under the couple thresholds for income and asset tests.
 
For those with family members or other relatives able to assist with accommodation, it may be appropriate to enter into a granny flat arrangement.  Alternatively, there are three main types of retirement facilities for those moving away from home and relatives. These are:
  • retirement villages
  • hostels
  • nursing homes.

Retirement villages

Retirement villages are sometimes confused with aged care accommodation, particularly hostels. Although both essentially require residents to pay a lump sum to gain entry, the rules are very different.
 
Aside from the usual strategies for maximising Centrelink benefits, there are very few real strategic planning opportunities for people entering retirement villages. The importance from a planning perspective lies in guiding clients on what is and is not possible, in addition to assisting with the smooth implementation of those plans. Indeed, the entry arrangements for retirement villages are diverse. Some villages allow a strata right, which pensioners can then sell when leaving. Others offer entry following payment of a fee or provision of a long-term loan, while some may defer all payments for a number of years, or even charge rent. Some villages charge entry fees as little as $5,000, while for others, the entry fee may run into many hundreds of thousands of dollars. Some may offer independent living, while others may offer varying degrees of support. About the only universal truth for retirement villages is that residents must be age 55 or over to live there.

Aged care facilities: hostels and nursing homes

Nursing homes and hostels provide higher levels of assisted care, typically where ongoing care is required on a daily basis. This article focuses on these two types of aged care facilities. Hostels provide lower levels of care, such as non-nursing staff being continuously on call, and assistance with meals, accommodation and social activities. Nursing homes cater for higher levels of assisted care, including constant nursing supervision. Extensive government subsidies are paid to facility operators.
 
The Australian Institute of Health and Welfare estimates the occupancy rate in aged care facilities ranges between 92–95% (Aged Care Commissioner, 2009). Elderly people cannot simply decide on their own to enter a nursing home or hostel. Gaining entry into an aged care facility can be a difficult process. No-one can just knock on the [aged care facility’s] door and say “knock, knock”.  Instead, prior to entry into aged care accommodation, a person will need to be assessed by an Aged Care Assessment Team (ACAT) made up of health professionals to determine whether they require low-level (hostel) or high-level (nursing home) care. ACATs are the gatekeepers for the aged care system, including:
  • nursing homes and hostels
  • home and community care
  • community aged care packages.
According to Aged and Community Services Australia, in June 2006 around 72,600 people were in predominantly high-level aged care services, with around 14,400 in predominantly low-level care. A further 80,000 people were in mixed high/low facilities. (Aged and Community Services Australia, 2008).  For financial advisers who have clients, or clients with parents set to move into aged care accommodation, it is important to establish the upfront and ongoing costs, as these could inform their decision about whether to sell, rent or retain their family home.
 
To do this, financial advisers may first need to establish a correct market value of the family home and be clear on whether they are dealing with the client themselves or a person acting with authority under a grant of Power of Attorney. Once this has been done, they can begin to deconstruct the myriad of fees and charges associated with the move into aged care accommodation.
The cost of aged care

 

Once a client has undergone an ACAT assessment and found a place in an aged care facility, they may be liable for three types of payments:
 
  • Daily fees which contribute towards living costs such as meals, laundry, linen and heating. These are made up of:
» a basic daily fee
» an additional income tested fee for residents with a higher income.
  • Accommodation payments which can be either an:
» accommodation bond for those in low-level care (hostels)
» accommodation charge for those in high-level care (nursing homes).
  • Extra service fees, which can apply for those entering facilities that offer extra services in terms of accommodation or entertainment.
 
As these fees vary depending on the client and their individual circumstances, it is important to examine them in greater detail.
Daily care fees
All residents in aged care facilities can be asked to pay a basic daily care fee to cover their day-to-day expenses. This can be charged at four different rates including:
 
  • Standard rate — for most aged care residents, including full pensioners and some part-pensioners with lower amounts of private income.
  • Phased rate — for those who entered permanent care from 20 September 2009, including part-pensioners with private income amounts above the income threshold for phased residents and self-funded retirees.
  • Protected rate — for those who were in permanent care as at 19 September 2009, including part-pensioners with private income amounts above the income threshold and self-funded retirees.
  • Non-standard rate — for certain people who entered aged care prior to 20 March 2008, including: self-funded retirees, pensioners who have agreed to pay a large bond, or residents who chose not to disclose their financial information to Centrelink.
The maximum basic daily fee for all permanent residents who first entered an aged care home on or after 20 September 2009 is 84% of the annual single basic age pension. This is also the maximum fee for all respite residents, excluding those receiving respite care on an extra service basis. This fee is indexed on 20 March and 20 September each year in line with the changes to the age pension. 
Income tested fee
In addition to the basic daily fee, an income tested fee may be charged to residents in permanent aged care based on their assessable income plus any pension income from Centrelink or the Department of Veterans’ Affairs (DVA). Only residents with a total assessable income above the maximum income of a full pensioner are asked to pay an income tested fee. A resident cannot be asked to pay an income tested fee if they:
  • are a full pensioner
  • are a respite resident
  • are an Australian ex-prisoner of war
  • were receiving permanent residential care at any time before 1 March 1998
  • have a dependent child.
This test uses the same rules as means testing for pensions, and clients who already receive an age pension, will not have to provide any further information. Retirees who do not receive an age pension may need to provide income information.

Accommodation charge

Clients entering high-level care may be asked to pay an accommodation charge which is a capped daily rate based on their assets at the time of entry. 
 
Accommodation bond
Clients entering into low-level care, such as a hostel, may need to pay an accommodation bond if their assets are above the minimum asset threshold of $38,500. Clients entering high-level care which is an ‘extra service place’, can also be asked to pay an accommodation bond. (Department of Health and Ageing, 2010) ‘If the value of your assessable asset is below $38,500  you don’t have to pay an accommodation bond, but if the value of your asset is over that amount, you will be asked to pay an accommodation bond.
 
This amount is negotiated between the client and the facility and can be paid as:
  • a lump sum
  • periodic payments
  • a combination of both lump sum and periodic payments.
If a resident agrees to pay the bond as a lump sum, they cannot be required to pay that ump sum during the first six months following entry, although they can choose to do so. If the bond is not paid in full on the day of entry, interest may be charged on the amount of bond outstanding. The interest rate is set at the date of entry into aged care. The maximum permissible interest rate charged is set by the government.
 
The bond is effectively an interest-free loan to the aged care home and by law it must be used by the home to improve building standards and the quality and range of aged care services provided. The aged care facility can deduct monthly ‘retention amounts’ from the accommodation bond for a maximum of five years. The rate of the deductions is fixed at a resident's date of entry. If the resident leaves the home, the balance will be refunded to them, or if something happens to them, the balance will be refunded to the estate, where clients move from low- to high-level care, the accommodation bond can be transferred with them. No further accommodation payment will be required, and when you go into that nursing home, you won’t be required to pay an accommodation charge if you’ve transferred that bond across. 
 
The only exception to this is where a person has spent more than 28 days outside of a care situation, in which case they will be required to make another accommodation payment.
 
Treatment of the home for assessing the accommodation bond amount
It is important to note that a person’s former home is generally counted under the aged care assets assessment when they move into aged care. The value of a resident's former home will not be counted as an asset when calculating the amount of any accommodation payment, if at the time of the asset’s assessment or the date of entry into care (whichever is earlier):
 
  • the partner or dependent child is living there
  • a carer eligible for an income support payment has lived there for at least two years
  • a close relative who is eligible for an income support payment has been living there for at least five years.

Options involving the family home

The costs involved in moving into aged care are potentially very high. As a result, clients may be faced with the difficult decision of what to do with their family home. Upon entry into aged care, clients can either:
 
  • sell the former (family) home
  • retain the former home
  • retain and rent the former home.
There are two key aspects to consider when making this decision:
  • The treatment under the aged care assets assessment for the purposes of determining the amount of accommodation bond.
  • The assessment under the Centrelink means tests.
Financial advisers should also make their clients aware that in addition to selling down their investments, there are other ways of funding the accommodation bond, such as reverse mortgages or the Centrelink Pensions Loans Scheme. The Centrelink Pension Loans Scheme is an under-utilised tool that comes in the form of a fortnightly payment up to the maximum rate of age pension. You can actually borrow money from Centrelink. That is, if you have security for example, your principal place of residence since 25 December 1997, the interest rate has always been 5.25%. When it comes to the family home, however, advisers should ensure clients consider all the options available, as this can have a range of different financial consequences.
 
Retaining the family home
Generally, the principal place of residence is exempt from assets tests for social security purposes. However, if a client decides to retain their family home upon moving into aged care, the family home will be assessed as an asset under the means tests, unless it is subject to exemptions. Under social security provisions, the family home is subject to a standard exemption, which applies for up to two years from the date of entry into aged care and continues to apply irrespective of whether the pensioner intends to return to their home.
 
If, after 2 years, the pensioner has not returned to their principal home then:
 
  • they are treated as a non-homeowner, and
  • their principal home is an assessable asset.
Under a rule known as ‘Exception 1’, the principal home can also be exempted for up to five years if each of the following three elements is established:
 
1. The pensioner entered a care situation between 5 November 1997 and 30 June 2004.
2. They are accruing a liability to pay an accommodation charge.
3. Their principal home is rented, in which case the rent received is exempt from the income test for the period that the principal home is exempt.
 
Exception 1 also provides that the principle home can be exempted indefinitely if each of the three elements below is established:
 
1. The pensioner entered a care situation on or after 1 July 2004, and
2. They are accruing a liability to pay an accommodation charge.
3. Their principal home is rented, in which case the rent received is exempt from the income test for the period that the principal home is exempt.
 
The rule known as ‘Exception 2’ states that from 1 July 2005, a pensioner’s principal home can also be exempted from Centrelink means testing if each of the following three elements is established:
 
1. The pensioner is in a care situation.
2. They are paying some or all of their accommodation bond by periodic
 nstalments.
3. Their principal home is rented, in which case the rent received is exempt from the income test for the period that the principal home is exempt. (Australian Government, Guide to Social Security Law, 2008)
 
To put Exception 2 in simple terms, if the homeowner or a life tenant moves into a lowcare hostel that requires an accommodation bond, paying off part of the bond in regular instalments, rather than all at once, allows the house and rent to be ignored for the means tests. 
 
For each exception, it is not necessary for the pensioner to establish that the rent from the former home is used to pay the accommodation charge or accommodation bond, and the amount of rent that is exempt may be greater than the accommodation charge or accommodation bond.
 
The Centrelink treatment varies where members of a couple are separated by illness. A couple is considered to be an illness separated couple where they are unable to live together in their home, and their inability to live together is due to either illness, infirmity or both, which results in their living expenses being greater or likely to be greater than otherwise expected, and the situation is likely to continue indefinitely. Home ownership status for both partners is derived from the partner residing in the home property.
 
Example
Couples entering aged care: treatment of the home Ivan, age 83, moves into hostel accommodation while his wife Jane will remain living in their family home. Ivan’s home will not be assessed as an asset when it comes to determining the accommodation bond he will have to pay, as his spouse remains living in the property. If Jane later moved into aged care accommodation too, the treatment can become slightly complicated. Unless another eligible person continues to reside in the home, its value will be counted as an asset for calculating the amount of any accommodation bond that may be payable by Jane. There will be no impact on the accommodation bond assessment for Ivan, as long as he remains in his existing facility, as the amount of the bond was set at the date he moved into the aged care facility. There could be implications if he were to move to another aged care home.
 
From a Centrelink perspective, if Jane and Ivan were considered as an ‘illness separated couple’, the home will be an exempt asset for the period that Jane remains living there. If Jane vacates the home to enter an aged care situation, the two-year exemption will apply to both Ivan and Jane from the date that she enters the aged care home. Unless the couple is entitled to treatment under Exceptions 1 or 2, the home would be assessed for Centrelink purposes at the end of the two-year period following Jane’s date of entry into aged care.
 
Selling the family home
Making a decision to sell the family home prior to a person entering an aged care facility can have serious implications for both the assessment of assets regarding the accommodation payment, as well as Centrelink. If the family home is sold before a person enters aged care, the proceeds of the sale will be included in the assessment of assets, which could mean they are liable to pay a higher accommodation bond or charge if their assets exceed the applicable thresholds. The proceeds will generally also be assessable under Centrelink’s assets and income tests. Where a person opts to keep their family home and decides to sell it after moving into aged care, there will be no affect on the accommodation payment, unless the person changes aged care homes. Centrelink’s treatment will depend on the marital status of the person. For a single pensioner in a care situation, if the principal home is sold during the two-year exemption period, the proceeds are immediately assessable under the assets and income tests, even when there is an intention to occupy a property to be purchased with the proceeds of sale.
 
An additional consideration is the potential capital gains tax (CGT) liability if the sale of the home occurs more than 6years after the owner has entered an aged care home. The person or the estate could be in for a bit of a surprise two years out, when suddenly the home is asset-tested for the age pension purpose, and then six years and a day out, and longer, if the property is then sold, it is then subject to capital gains tax.
 
Renting the family home
Where a person chooses to rent their former family home, both the home and rental income will be assessed as an asset when determining the amount payable for aged care. However, where a person chooses to rent their home while paying at least part of their accommodation bond in periodic payments, an indefinite exemption for the family home, and the rent can apply for Centrelink purposes. This means there is a strong case for retaining the family home and renting it out while paying an accommodation bond by instalments. Ideally they [clients] retain the home, rent it, but at the same time only pay a part of the accommodation bond, so that there is an ongoing interest payment that they need for the remaining accommodation bond outstanding.  In this case, Centrelink would view the rental income from the family home as paying the interest on the accommodation bond, regardless of the amount actually received. The home will not be asset tested or income tested, which can also provide social security benefits. They can then retain a significantly greater amount of age pension, if it is the asset test that is the determining test for their age pension benefit. While this can be advantageous, it may not make financial sense, particularly if the rental income is inadequate or the maintenance levels on the property are too high. Retaining the home and getting the special exemption where you rent the home out and pay periodic accommodation payments is attractive generally from a Centrelink point of view, but it may not be financially the best option for all clients. It is important to consider the impact that maintaining and tenanting the property will have and in some cases, it may be easier for them to have a diverse investment portfolio instead.

Couples entering aged care

For couples moving into aged care accommodation, timing their move separately can allow them to take advantage of the exemption that applies when a spouse remains living in the former family home. It can also mean they are eligible to receive higher rates of pension, as each member of the couple would be entitled to receive the maximum single rate of age pension while still being assessed under the couple thresholds for income and asset tests.
 
Where one member of a couple is in aged care and the other one’s not in aged care, the cost of living between the members of the couple increases and the Government recognises that by assessing them against the single rate pension instead. However, there is an argument there that potentially you could have 2 members of a couple going into care together. They could have their assets assessment done prior to going to the facility and entering into care, and therefore, in those situations, they’re still residing in the home and therefore, the home’s exempt. This may mean that neither member of the couple will be liable for an accommodation charge if their assets are valued below threshold. If the home was exempt from both members of couples assets assessment and they really didn’t have a lot of other assets, then this could lead to them both be being not charged an accommodation bond, because their assets are too low or not charged an accommodation charge. While this can seem appealing, it ruins their chances of receiving an ongoing exemption for the home under the Centrelink provisions once the standard
two-year exemption has passed. This can be bad news if they’ve elected to retain their home and rent it out, because they wouldn’t be making ongoing accommodation payments in that situation and therefore, that special exemption, the indefinite exemption, cannot apply in that case.  While staggered entry into aged care can provide financial advantages, Sanderson
thinks there are other factors that should be considered. It’s very important when both members of a couple are potentially going to be entering care at similar times that they really try and give themselves the best chance of entering care togetherand if you’re staggering entry there is a chance that the second member of the couple may not find a place in that same facility. The emotional impact of separation also needs to be considered, as some couples have spent more than 60 years together.
 
The expense and uncertainty involved in moving into aged care can make this a challenging and difficult time for many people. However, it doesn’t have to be. By helping their clients understand the costs involved in aged care accommodation and how decisions relating to the family home will impact on their lifestyle, financial advisers can provide valuable guidance during such a major transition. With Australia’s ageing population set to ensure that aged care remains a massive growth industry, it is worth taking the time to understand how aged care intersects with social security and what this means for clients.

Issues with retirement villages

Over the next 40 years, the number of Australians aged 85 and over will more than quadruple — from around 400,000 in 2010 to 1.8 million by 2050, according to the Federal Government’s third intergenerational report. (Australian Government, 2010) This ageing population means more and more retirees will have to consider their living arrangements for the next stage of their life. As a person’s home has a huge impact on their health and happiness, it is essential all options are taken into account. For some, granny flats will be a suitable option, while for others aged care facilities may be required. For many retirees, retirement villages could provide the right mix of security and independence. However, as retirement villages fall outside of the Centrelink definition of ‘aged care’ facilities, there are some important factors to consider.
 
Each Australian state and territory has its own legislation regulating the operation of retirement villages. The laws in each jurisdiction are different and contain unique definitions of what is — and is not — considered a retirement home and, therefore, regulated accordingly. Other legislation, such as fair trading and consumer laws, may also impact on the operation of complexes. The legal and administrative vagaries make it essential that those considering entry obtain professional financial and legal advice prior to signing any contracts. Financial advisers have a key role in helping their clients understand the different types of retirement villages available, the ownership structures and the fees they could be liable to pay. As the transition to retirement village living often involves selling the family home, there are also social security and tax implications to consider.
 
Retirement villages are best described as a housing and lifestyle option for those aged 55 and over. They are governed under state-based legislation which outlines the terms and conditions of operating the village as well as the fees and charges that can apply. Retirement villages can take a variety of
forms. It could be an apartment, high rise or medium rise. It could be semi-detached dwellings such as town houses or villas, and some villages also offer stand alone houses as part of their accommodation.’ Many retirement villages only offer self-care accommodation, where clients look after-themselves, and facilities are similar to those available in normal home units. However, there are other degrees of care which may be available including:
  • independent living — low level of care
  • assisted living — higher level of care
  • nursing care — only offered by some villages and typically includes qualified nursing staff available ‘around the clock’.
There are also serviced apartments offering additional features such as the provision of meals, cleaning of the premises, laundry, hairdressing, community transport, emergency calls or catering for people who speak languages other than English. Despite some similarities with hostel accommodation, serviced apartments are not classed as hostels or nursing homes, unless they receive government funding and are governed by the relevant legislation. Where such funding is provided, clients are only allowed entry once they have been assessed by an Aged Care Assessment Team (ACAT). Some retirement village complexes can also contain an amalgamation of retirement village and aged care accommodation, combining facilities for those with high and low level needs.

Benefits of retirement village living

For many people over age 55, retirement village living holds appeal due to the range of benefits provided. These include: access to various levels of accommodation from independent living to assisted:
  • living and nursing care
  • increased security
  • recreational facilities
  • becoming part of a community
  • village activities
  • home and garden maintenance
  • on-site medical assistance.

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