Finance report: A question of affordability

Guest writer Rachel Lane examines the challenges of meeting the costs of residential aged care from a consumer’s perspective.

By guest writer, Rachel Lane*

In March last year, the Federal Government changed the model under which aged care facilities receive funding, along with the scale of income and assets assessment for incoming residents. As a result, more residents will now qualify for high care. At the same time, the government also changed a number of aged care fees and charges, including the accommodation charge which is payable by nursing home residents.

The accommodation charge, which used to be a flat rate of $17.55 per day, is currently $21.39 per day for pensioners and $26.88 per day for non-pensioners. It is however planned that the charge will increase with all residents paying the higher rate from 20 March, 2010.

The assessment for the daily care fee also changed, going from a dual system with separate payments for pensioners and non-pensioners, to a flat rate for all. It currently stands at 85 per cent of the full single pension.

Take a closer look
The problem when you look at the figures on this simple basis may not be that obvious. But as the full single pension rate is $14,765.40 per annum, the total of the daily care fee and the accommodation charge is $19,834.10 per annum, or 134 per cent of the full pension.

And this does not consider that residents also need around $50 per week ($2,600 per annum) to meet expenses not covered by their fees and charges, such as medication, chocolates, haircuts, outings and grandchildren’s birthday presents. Assuming a pensioner generated sufficient income to cover these costs and the $5,069 annual deficit, their pension would reduce by $1,632 per annum and their cost of care would increase by $1,020.50 each year through the introduction of an income tested fee (ITF).

So how is it possible for a pensioner to afford to live in a government funded nursing home? One option is to keep and rent the former home, as the asset is exempt from the assets test and any income from the asset, such as rent, is not assessable for pension or ITF purposes if the resident is paying the accommodation charge. While this is a good solution for some, many pensioners live in houses that would require the outlay of significant capital to bring them up to market standard. And in many cases, the family doesn’t want the hassle of managing an ‘investment property’ and all that goes with it.

Many families make the decision to sell the former home. Unfortunately, while this ensures that the income can be produced to meet the cost of care it often results in a reduction in pension and an increase in the cost of care.

Case study
Take the example of Shirley, a pensioner. She has a house worth $350,000, $20,000 in cash, $2000 in contents, and she moves into a high care facility.

Shirley’s total income
Pension entitlement: $14,765.40 p.a.
Interest on Cash (6%): $1,800 p.a.
Total: $16,565.40 p.a.

Shirley’s cost of living
Daily Care Fee: $32.95 p.d. ($12,026.75 p.a.)
Accommodation Charge: $21.39 p.d. ($7,807.35 p.a.)
Out of pockets: $50 p.w ($2,600 p.a.)
Total: $22,434.10 p.a.

Shirley and her family are very concerned that she will be reducing her liquid funds by around $6,000 per year, thereby reducing her ability to earn the income to pay her fees, as well as having funds on hand for emergency purposes.

If Shirley sold her house the impact would be as follows.

Shirley’s income
Pension entitlement $7,648.60 p.a. (a reduction of $7,116.80 p.a)
Interest on Investments (6%) $22,200 p.a.
Total $29,848.60 p.a.

Shirley’s cost of living
Daily Care Fee $32.95 p.d./$12,026.75 p.a.
Accommodation Charge $21.39 p.d./$7,807.35 p.a.
Income Tested Fee $12.19 p.w./$4,448.36 p.a. (an increase of $4,448.36 p.a.)
Total $24,282.46 p.a.

While Shirley is now in a situation where her income is greater than her cost of care, as her assets grow due to unspent income, her pension will reduce and her ITF will increase.

Putting bonds into the equation
If Shirley qualified for low care, paying a bond of $300,000, her cost of care would be $12,026.75 per annum (no ITF applies) and she would receive the full pension, providing her with sufficient income to meet her cost of care and to have a weekly sum of $50 for out of pocket expenses. As you can see, paying bonds can make high care more affordable for pensioners.

But it’s not just Shirley who may benefit. The aged care industry faces a huge problem going forward if residents do not pay accommodation bonds.

*Rachel Lane is the Aged Care Specialist (Senior Financial Advisor) with St Andrew’s Australia

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