Aged Care minefield needs careful navigation
SPEAKING as a financial adviser, I can say the financial aspects involved in placing a loved one into aged care is mind-boggling and filled with twists and turns that's way beyond the understanding of the average Australian.
I'm not at all surprised to hear the whole sector will now be the subject of a royal commission into aged care announced this week.
What I have learnt to date is that anyone who must engage with the system needs a strategy.
Here's what I recommend: if you are an older person who requires care services, the first step is to contact the federal government department, aptly named My Aged Care, and they will assess your needs.
From there, if you require a lower level of assistance and wish to stay in the family home, you may be assigned a home-care package.
This covers services such as assisting with personal hygiene and care, dressing and undressing and food preparation.
You pay a daily fee depending on your income level. If you're a full pensioner, you'll pay $10 per day, whereas if you have other income and financial assets, you may pay up to $40 per day.
If you are assessed as requiring a higher level of care, you will be directed to move into an aged care home and this is where it starts to get tricky.
There can be both upfront and ongoing fees.
The upfront fee, which is called a refundable accommodation deposit, is a lump sum that the aged care provider asks for upon admission.
Although it's an upfront fee, it can be negotiated as an ongoing payment or as a part lump sum and part ongoing payment.
For the upfront lump-sum option, the range of deposit expected varies from a few hundred thousand up to $1 million for the more exclusive aged care homes.
The main requirement is that the aged care provider cannot
ask for a lump sum that leaves you with less than $45,500 in assets.
There can be negotiation on the deposit amount so it's not an equitable system. One person may be asked to pay a $1m deposit while another person $100,000 for the exact same place, with the differences occurring due to different level of assets and ability to negotiate a lower deposit.
The alternative to the lump sum deposit, is to pay a daily accommodation payment. This fee is calculated by applying an interest rate on the lump sum that you should have paid that is set between 3.75 per cent and up to a maximum 5.96 per cent.
Number crunching then comes in to work out whether the family home can be kept, rented out and the daily accommodation payment paid from the rental income received.
However, given the interest rate on the unpaid lump sum can up to 5.96 per cent, the net rental yield on the family home will usually fall short of this and result in cash being depleted over time, at which point there is no choice other than to sell the family home and pay the proceeds to the aged care provider.
And just when you think you can relax having dealt with the upfront entry costs, you're hit with the realisation that there are ongoing costs, which can be significant.
To make it more complicated, there are several layers of ongoing fees to deal with.
If you wish to move out of the family home but don't require higher level aged care services provided at an aged care home, an alternative option is an over-55s retirement village.
Entry costs vary from a few hundred thousand to more than $1m depending on the location and property.
But as you can probably guess by now, it's another minefield of complexities.
This was drawn out in the ABC's Four Corners expose into Australia's largest listed retirement village group, Aveo, last year.
There are different forms of ownership such as leasehold estates, licences to occupy, company share arrangements and strata title ownership.
All of which has different legal rights and costs.
Add to that a sector that is infamous for complex contract and hidden costs and it's a recipe for disaster.
James Gerrard is the principal and director of Sydney financial planning firm www.financialadivsor.com
This story was first published in The Australian.