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Means test change likely to increase house sales, reverse mortgages

Changing the rules on the aged care means test for residents who pay by periodic payment is likely to force pensioners to sell their house or take out a reverse mortgage – all for a meagre budget saving of $26 million over five years, according to aged care financial experts.

Although, one stressed that as most people’s knowledge of the aged care system was limited until they needed it, they would be unlikely to know any different when the time came.

The change in policy was also unlikely to impact aged care providers or a resident’s preference to pay their aged care costs by a daily accommodation payment (DAP) or lump sum, a refundable accommodation deposit or RAD, they said.

As announced in this week’s Budget, the government will remove the rental income exemption on the former home in the aged care means test for those paying a DAP to bring it into line with those paying by a RAD. However, rental income from the former home will still continue to be exempt from the pension test.

Rachel Lane, principal Aged Care Gurus

Rachel Lane

Pensioners would have to re-think keeping and renting their home as a way of funding aged care costs, said Rachel Lane, principal of Aged Care Gurus.

“The wealthy are going to protect their assets and grow their assets while they are living in aged care and the pensioners are going to have to eat their assets,” Ms Lane told Australian Ageing Agenda.

Ms Lane said full-pensioners would find it harder to be able to afford to keep and rent their house (see case study below), and those who sold would then be likely to lose significant amounts of pension, particularly when the asset test rules change in 2017.

She was hesitant to say whether the measure would result in more RADs for providers, but said a sale could lead to people choosing fancier accommodation in aged care.

“Pensioners may seek higher valued aged care accommodation in an attempt to exchange a non-exempt asset (the value of the former home) for an exempt asset (the value of the RAD),” Ms Lane said.

Unfortunately, reverse mortgages, which erode the value of assets over time, may also become more prevalent in meeting the cost of aged care, she said.

Future consumers won’t notice

Fiona Somerville

Fiona Somerville

While the above was true, most people would not know the difference when their time comes to use the system, according to Fiona Somerville, a commercial director of Ideal Consultancy.

“The consumer entering aged care will enter into a marketplace that is operating at the time when they need care. Talking about the olden days of today’s aged care; we know the difference but for Joe Average, that’s a history lesson and it is completely irrelevant,” Ms Somerville told AAA.

The other issue to consider even now was that a person could only take advantage of the situation if they had a rentable property, she said.

Ms Somerville agreed it was difficult to assess the impact on consumer preferences for RADs or DAPs because it was still early days with the current scenario.

“We don’t have enough trend data or meaningful data because there has been so much settling down. With Centrelink delays we have also had issues around pricing movements and also people getting used to a new system and having to explain that,” she said.

The change, which had been pitched as a fairness and equity measure by the government, has been welcomed by many in the sector including HammondCare CEO Dr Stephen Judd. Ms Somerville said it was just another set of rules aimed at levelling the playing field and was fairer.

However, for a saving of $26.2 million over five years in aged care costs, some, including Ms Lane, think the measure is mean.

“The politicians would spend more than that over five years on M&Ms. It is ridiculous. For the saving, the meanness of it versus the benefit of it don’t seem to correlate,” she said.

While it may be consistent with a move to a user-pay system, Ms Lane said it was important to remember the rental exemption measures were introduced to assist people in meeting the cost of aged care when the accommodation charge was increasing to $16 a day.

“You are now talking about people paying five, 10 times that amount of money but then removing the exemption on their income,” she said.

Paul Dwyer

Paul Dwyer

These were sentiments echoed by Paul Dwyer, an aged care credit advisor with Aged Care Finance Solutions, who said removing the rental income exemption was not the right policy.

“The previous policy was made to allow an older person to contribute to the cost of their care and accommodation without being punished for doing so,” Mr Dwyer told AAA.

As people were supposed to be able to contribute, it did not make sense to take away one of the areas where they can improve their ability to do that, he said.

“Of equal relevance is that the means testing is linked to the Social Security Act 1991. This Act allows residents entering care to rent out their former house, with the rental income exempt from the income test for aged pension calculation.”

He said Living Longer Living Better aimed to protect older Australians from a fire sale of the family home, but this measure would force people to sell their house, or take out a reverse mortgage.

Case study

Ms Lane offered the following case studies to illustrate the impact on pensioners:

Currently, a full-pensioner with a house that produces $400 per week rent, $60,000 in the bank and $2,000 in personal effects is paying a DAP of $69.70 per day ($400,000 RAD equivalent).

Under the current rules the means-tested care fee is $1.70 per day, which results in a cash flow shortfall of around $2,000 per annum. Under the new rules the means-tested care fee would be $26 per day and the cash flow shortfall would increase to around $11,000 per annum.

In contrast, a part-pensioner receiving $600 per week rent with $250,000 in the bank and $20,000 in personal effects has paid $650,000 by RAD and is paying a DAP of $8.71 ($50,000 equivalent).

Under the current rules the means-tested care fee is $45 per day, which equates to a cash flow surplus of $14,170 per annum. Under the new rules, the means-tested care fee would be $88 per day and result in a cash flow shortfall of $1,500 per annum.

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One Response to Means test change likely to increase house sales, reverse mortgages

  1. Steve Power May 15, 2015 at 4:37 pm #

    I don’t understand why the idea of a reverse mortgage is frowned upon within a means test framework. I appreciate their may be financial implications in a massive downturn in the property market, but, that isn’t really the issue at play here.

    Those asset rich, cash poor older members of our community have choices about where they live, how long they live there and under what circumstances they choose to move. Like the rest of the community, there is always “give and take” in life decisions (such as where we choose to live) we cant have it all, all the time. And so, for those who don’t have the cash flow means to remain supported to live in their own home or move into a facility of their choice but have assets that can be drawn upon (reverse mortgage) to pay for individual choices about where they live, than, so be it. Surely not a bad thing? This is providing seniors with the capacity to take financial responsibility for the decisions they make as all throughout the ageing experience we encourage older people to contribute in care plans, support plans, socially connected etc, so why not financially?

    Sure, I appreciate that letting go of the family home, garden, their social network etc can be quite a challenge and their capacity to overcome this in later life only gets harder, however, many older people don’t have this choice, and for those, who have the means to exercise this choice should be encouraged to contribute to the cost of exercising it instead of it coming from the tax payer. Isn’t this just called living within your means? much the same as what younger generations get hounded for?

    Having said all that, I can appreciate it being quite uncomfortable for older people to reengage the banking industry, so it really needs to be worth the pain and discomfort. I agree with Fiona Somerville here and ask the question, is $26.2 million over 5 years really worth the heartache?

    People who talk about the “Tsunami” of the ageing population. Not quite sure about the ageing population being akin to a natural disaster, instead, I suggest, we have known for quite a while exactly what is happening around to ageing population and challenges and opportunities that this presents. its time to be brave and reshape the economics of ageing in a socially fair and responsible way to ensure everyone has the opportunity to age with dignity and redistributing some wealth along the way.

    Oh, and just in case it isn’t entirely obvious, I am no economist 😉

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