Zurich’s recent Intergenerational Advice Masterclasses not only brought to advisers deep research, practical solutions and a process to the challenge of becoming the “family adviser”, but also created a forum where advisers shared their endeavours, successes and failures in the quest to become the central hub in a client’s tribe.

In part three of a four part series the dialogue of these Masterclasses is shared to drive an increase in the number of Australians seeking financial advice by tapping into the most powerful institution an adviser can have a positive influence on the family.

Traditionally the advice proposition has centred on being able to provide an investment solution for a lump sum retirement benefit that was to be invested relatively conservatively to provide income for the duration of the client’s life. That lifespan was in relative terms short and easily accommodated by even moderate rates of return.

Today at the age of 65 the average person will live a further 18 years. Longevity of capital is now a major concern and that’s not the only thing that has changed for the relevancy of the advice proposition.

According to research by Accenture, today’s affluent Boomers’ attitudes toward aging are different from their parents’ generation[1] . Boomers are experiencing better health and life outcomes and expect with their good health to be able to travel and in many instances remain active contributors to the community be it by continuing work or in vocational activities.

These changed circumstances mean that their heirs may in fact not only receive any inheritance later in life (due to the increased life expectancy of the boomers) but that the longevity of any income stream the boomers are reliant upon may be challenged.

This is in contrast to the seniors who traditionally looked to maximise the legacy they were to leave to the next generation.

Research also indicates that boomers are not only spending down their wealth but looking to distribute it now based on the want to influence and enjoy the younger generation’s use of this wealth. The National Seniors Productive Ageing Centres 2012 report quantified not only the amount of money changing hands from the post 50 year old age group to the family but also monetised the time changing hands, that is, the amount of unpaid support in time given to family members. The report showed that each year $53 billion dollars of time and money is already changing hands.[2]

What does all this mean for advisers? First, the implications of longer life expectancy and different attitudes towards retirement mean that advice businesses need to prepare for clients who require longevity from their funds and whom may continue to work past retirement age. Their need for more complicated strategies as well as considering tax and estate implications requires a different proposition from tradition retirement planning.

Second, not only may the heirs, perhaps an advisers gen X clients, have to wait longer for an inheritance, they in fact might not get one at all, thus raising the need for more advice around cashflow management, debt recycling as well as aged care expertise; yes these heirs may in fact rely upon their advisers to help them navigate aged care solutions including how to fund it, for their parents. The reality is also that some heirs will not stand to inherit the full value of the Boomers’ current portfolios.

So for an advice business two different value propositions may need to be formed and capabilities built around them. Not only are boomers different in their attitude to advisers (they favour the advice led model, whilst gen X’rs have a more collaborative approach) but the needs of these groups are becoming quite divergent. Businesses will need to adapt their value pitch, build capabilities and have the right services tailored for each group to truly engage and differentiate to attract these clients and importantly to retain them.

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[1] Accenture Wealth and Asset Management Services, 2012, The Greater Wealth Transfer.

[2] National Seniors Australia, 2012, It’s not just about the money: intergenerational transfers of time and money to and from mature Australians

Click here to view Video: The intergenerational advice challenge and solution – Part 1

Click here to view Video: The intergenerational advice challenge and solution – Part 2

Click here to view Video: The intergenerational advice challenge and solution – Part 4

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The government subsidises a range of aged care services. And clients do not necessarily have to move out of their home to receive help as the government now subsidises more home-care packages which provide care in the client’s own home.

From a financial planning point of view understanding the fees payable is important to ensure clients can generate sufficient cash flow and meet all living expenses.

What does care cost?

Before a client can apply for either subsidised home care or residential aged care, they need to be approved by an Aged Care Assessment Team/Service. Further information is available here.

The fees for aged care in a government subsidised service from 1 July 2014 are shown in the diagram below but prices may index on 1 July 2015.

Example:

Alice lives at home with her husband and has been approved for a home-care package after 1 July 2014. She is fully self-funded and does not qualify for any age pension. Together they have $80,000 a year of assessable income. On her share of the income ($40,000) it is estimated that Alice will be asked to pay:

• Basic fee – $3,493 per year, plus
• Care fee – $6,708 per year[1].

Note: This is based on rates estimated to 30 June 2014. At this date, a member of a couple (where both living at home) can have assessable income up to $19,172 before an income-tested care fee is payable.

Reducing the care fee

When calculating the fees, assessable income includes amounts received from Centrelink or Veterans’ Affairs as well as assessable income from assets and investments using Centrelink income test rules. For example, cash, term deposits and shares will be assessed under deeming rules.

Clients may be able to structure their investments in a way that reduces assessable income to reduce the fees they will be asked to pay. Before making a recommendation it is important to review the client’s full situation to ensure sufficient cash flow can be generated and to determine the impact on their net wealth.

If a client is likely to pay a high care fee, you may wish to consider recommending that the client sets up a discretionary family trust and gifts money from their name into this trust. The trust can then invest this money into an investment/insurance bond which pays no income to the investor directly. All income is reinvested into the bond which is taxed at 30% under current tax law. This will not change level of the client’s assessable assets however it might help to reduce assessable income which is calculated as the actual taxable income generated by the family trust. As long as the client/trust does not make withdrawals from the bond within the first 10 years (or until death of the life insured) there is no taxable income for the trust.

This is shown in the diagram below.

Example:

Alice seeks advice on how to structure investments to pay the additional expenses for home care. The advice provided is to set up a family trust and transfer enough of their investments into the trust to reduce the income-tested care fee to nil.

This saves her $6,708 per year and she will now only pay the basic fee of $3,493 per year.

In the first year Alice will incur some expenses to set up the trust and investment strategy. She may also incur ongoing fees for reviews and operation of the family trust. The insurance company pays tax at 30% which may be higher than her personal tax rate but it is the after-tax return which is important to compare.

It is important for Alice and her husband to ensure this strategy leaves them enough cash flow (or cash reserves) to pay their living expenses because to benefit from these savings they are limited in their ability to make withdrawals from the family trust.

Alice and her husband also restructured their wills and estate planning due to this change in assets. Note that their Wills cannot dispose of assets held in the family trust so the trust must be structured with a mind to how the income and assets of the trust are to be distributed and to whom following the deaths of, in this example, Alice and her husband.

Note: This strategy may save a part-pensioner up to $5,000 per year and a self-funded retiree up to $10,000 per year. These amounts are per eligible person so savings could double if both members of a couple are accessing home care packages.

Developing an advice solution

Before clients make any changes to investments a review of their full financial situation is important. The savings in home-care fees needs to be considered in conjunction with cash flow, eligibility for Centrelink or concession cards, aged care fees, taxation and estate planning.

If a client is making a move into residential aged care, the same strategy may help to reduce the means-tested part of her care fees but as this fee is based on assets and income and the strategy only reduces assessable income the use is more limited. It will only provide a benefit if the means-tested part of the care fee can be reduced to below the annual cap and the savings outweigh any costs.

[1] Calculated as [(($40,000 – $36,624)/364) * 0.5] + $13.74 = $18.38 per day or $6,708 per year

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Disclaimer: This whitepaper is issued for the use of financial advisors only. Suitability of an investment in a Centuria Investment Bond will depend on a person’s circumstances, financial objectives and needs, none of which have been taken into consideration in preparing this whitepaper. Prospective investors should obtain and read a copy of the Product Disclosure Statement (PDS) for any investment bond and consider the information in the PDS in light of their circumstances, objectives and needs before making a decision to invest. This document is not an offer to invest in any of Centuria’s Investment Bonds. Issued by Centuria Life Limited ABN 79 087 649 054 AFSL 230867.

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Ages 40 and 70 are crucial ages for aged care planning and SMSFs.

The US based senior care network, Home Instead, was the first one to refer to what is now universally known as the 40-70 rule. Since then, many operators in the aged care arena have picked up the term, as it succinctly encapsulates the need for the aged care discussion.

“Quite simply, the rule refers to the importance of the ages of 40 and 70 in aged care decision making; when they turn 40, children need to think about aged care issues in relation to their 70 year old parents. With the recent aged care reforms, and the accompanying complicated financial decisions that now need to be made when planning for aged care options, the 40-70 rule applies now, more than ever,” Ms Lawton says.

Both of these ages should also act as an advice alarm of sorts for advisers, and SMSF Trustees.

“Financial advisers with clients in their 40s, should consider having the conversation with their clients about the state of their parents’ health, and whether their parents have made their aged care wishes known to their children.

“For those with older clients in their 70s the question of aged care is also worth raising. Although it may seem difficult, it is easier to have the conversation about what they want for their future, now, compared to when they may be in hospital and unable to clearly make that decision for themselves.

“The 40-70 rule impacts trustees of SMSFs as well, particularly when the SMSF is made up of 70 year old parents and their 40 year old children.

“The issues faced by those considering aged care options are many and varied, and increasingly complicated. Decisions need to be made on the sale of the family home, the varying costs of alternative accommodation options; the level of the ongoing fees; as well as the impact of theses actions on pension entitlements.

“It is important that those aged 70 face this reality, and make the decisions on aged care for themselves, while they are able to,” Ms Lawton concludes.

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AUSTOCK Life has calculated that people entering aged care facilities after 1 July will be up to $10,000 or worse off rather than entering such a facility in the current financial year.

“We took a view that with average assets of around $350,000 and not owning a home, an average person going into an aged care facility will be around $10,000 worse off over their stay in the facility,” said Richard Atkinson, AUSTOCK Life.

AUSTOCK Life prepared a simple case study to show how an average Australian pensioner going into aged care will be worse off after 1 July 2014.

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Louise Donald

Leading wealth management advisory firm, Centric Wealth, today said that despite the Federal Government’s Living Longer Living Better reforms, the aged care industry continues to be plagued by complexity and uncertainty, particularly in relation to bonds.

An accommodation bond, or accommodation charge, is payable upon entry to an aged care facility by the majority of residents. The aged care facility holds the bond in ‘trust’ for the resident and uses the interest earned on the bond to assist with general maintenance costs associated with the nursing care facility.

Centric Wealth adviser, Louise Donald, said the aged care reforms aimed at protecting residents, may still cause uncertainty in the community.

“The issue of bonds is understandably confusing for many people.  The failure of a Melbourne nursing home last year, saw 16 families in fear of losing bonds of up to almost $450,000 each.   Fortunately, the Federal Government guarantees bonds, so the families will eventually recover the monies.  However, the incident would have doubtlessly placed considerable stress on some of the most vulnerable people in our community and their families.

“Currently, residents can negotiate their own bond levels.  Paying a higher bond means residents can access higher quality facilities, guarantee placement at a preferred facility, increase the level of means-tested pensions or reduce the required daily fees.  However, from 1 July 2014, all nursing homes must advertise their maximum required bond, therefore negotiating a higher bond than this will not be possible.”

Other changes soon to come into effect include the removal of the distinction between low and high care. Currently, aged care facilities are classified as either ‘low care’ or ‘high care’, with the main difference being the level of care that is provided.  A lump sum bond is generally required upon acceptance in a ‘low care’ aged care facility but there is no bond payable if you are assessed as requiring a place in a ‘high care’ facility, as an accommodation charge is required instead.  However, from 1 July 2014, the reforms will remove this distinction and consequently, there will be a bond payable for all aged care facilities for residents, unless they meet the criteria for exemption.

The amount of bond payable depends on a number of factors, however a key factor is the financial situation of the person entering the home. Currently, the aged care facility can charge any amount of bond as long as the resident is left with at least $44,000 in assets.  The maximum bond payable is dependent on the assets of the person entering the nursing home.

In terms of refunds, upon exit from a nursing home the original bond amount will be returned to the resident or their estate minus a retention amount. The current retention amount deducted from bonds over $39,720 is set at a maximum of $331 per month for a maximum of 60 months ($331 x 60 = $19,860).

“From 1 July 2014, retention amounts will not be deducted from accommodation bonds, rather, the full bond amount will be refunded, which is also reflected in the new name for lump sum bonds from 1 July 2014 – ‘refundable accommodation deposit’.  However, as was evident last year, there are occasions where the bond may be lost.  It should also be noted that residents who elect to pay the bond by interest only instalments will not receive any of this back from the nursing home on exit.”

Ms Donald said; “The last thing most families need when investigating aged care or dealing with an estate, is the surprise of extra costs or lost monies.  That’s why it’s so important to ensure you understand exactly what you need to pay and what entitlements may be available.

“While you can choose to have an asset assessment carried out by Centrelink or the Department of Veteran Affairs, it is worthwhile speaking to a qualified financial adviser before completing any asset assessment forms.”

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Australians should sign a financial Enduring Power of Attorney when they retire: EQT

Far too many retired Australians have not granted a financial Enduring Power of Attorney, which can lead to problems for their loved ones and unnecessary family conflict, said Anna Hacker, wills and estates accredited specialist at Equity Trustees Limited (EQT).

“As Australians live longer, it becomes increasingly necessary to have measures in place in case they become mentally incapable of making decisions or physically unable to cope.

“I would suggest that having a financial Enduring Power of Attorney is as important as a Will for the retired and if they don’t already have one every Australian should sign a financial Enduring Power of Attorney when they retire.

“Indeed, every retired Australian should have both a Will and a financial Enduring Power of Attorney – if not, they are likely to cause problems for their family. Yet far too many Australians have neither.”

Ms Hacker said that, put simply, a Will gives instructions as to what happens to their assets when they die, and an Enduring Power of Attorney allows the nominated Attorney, or Attorneys, to take action if the granter is no longer capable of doing it for themselves.

“The people nominated can only make decisions to do with finance or property and in these areas all actions taken are legally binding.

“However, the financial Enduring Power of Attorney does not cover other areas such as decisions about care or medical treatment.

“One or more people can be appointed with a financial Enduring Power of Attorney and often it is the same person or people nominated as Executor in the Will – but it doesn’t have to be.”

Ms Hacker said it is important for anyone appointed with a financial Enduring Power of Attorney to have an intimate knowledge of the person’s financial affairs.

“It is important that all cards are placed on the table by anyone nominating an Attorney to act, to prevent costly oversights.

“Without this knowledge, bills may not be paid, share entitlements lost, and property forfeited.

“The responsibilities of a person named as the Attorney can be quite onerous and any actions taken must, by law, be motivated solely in the best interests of the person granting it.

“They cannot take any action that benefits themselves or others – such as fee arrangements – unless it is specified in the document itself.

“Only the person granting a financial Enduring Power of Attorney or the State Administrative Tribunal can cancel it.”

Ms Hacker said that EQT recommends that when people create a financial Enduring Power of Attorney, they should consider documenting their thoughts on what they would like to happen if they become incapacitated.

“This way, their wishes are made clear to the people who need to make decisions on their behalf.

“Having a financial Enduring Power of Attorney is particularly important for those who have responsibility for others, such as dependants,” she said.

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Louise Biti

Too often articles and information published on aged care focus on how to reduce the accommodation bond. Many clients (and their families) will also express a reluctance to pay the high bonds required.

The opportunity to initially agree on a low bond can give you a stronger negotiating position to create a positive outcome with fee trade-offs or higher investment earnings. But too much focus is arguably placed on trying to reduce assessable assets to limit the maximum bond payable.

Bond negotiations

The most important aspect of aged care is securing a place in the facility of choice. Strategies that reduce assets or undervalue assets reported may only result in losing the place, or never receiving an offer from the facility of choice.

Most facilities set a target bond range for new residents. This can be influenced by a range of factors, one of which may be how much the client has in assessable assets. It can be difficult to obtain an estimate of the bond from the facility without first providing asset details for the client.

The only rule in legislation in relation to the level of bonds is that after paying the accommodation bond the client needs to be left with at least $44,000 in assessable assets. But what does this mean in practice? And what can go wrong? After all, the rule is designed to ensure that aged care is affordable and the fees for each resident are based on their level of assets and income.

The steps for keeping bond negotiations in perspective are:

Step 1 = What will it take to be offered a place?

Step 2 = Can the person afford this bond?

Step 3 = Does the fee represent value for money?

To see how these steps apply in practice, let’s review the case study below for Faye.

Faye’s dilemma – case study

Faye has become too frail to continue living in her home. She has an Aged Care Assessment Team (ACAT) approval to move into low care. Her daughter Caroline would like Faye to move into a residential facility near her home so it is easy to visit each day.

Caroline has spent time investigating options in her local area and has decided on a facility five minutes from her home. It has a very good reputation and is quite new.

Now, comes the difficult part with negotiating the bond.

This is a new facility and is carrying significant levels of debt used to fund the purchase of land and the building construction. The accommodation bonds are set at a minimum of $500,000 but range up to $650,000 depending on circumstances such as the resident’s level of assessable assets and the size of the room.

Faye’s only assets are her home in a regional town which is valued around $360,000 and $40,000 in the bank.  Her home contents are valued at $5,000 and she does not own a car.

The ACAT team left Faye a copy of the government’s booklet and pack – 5 Steps to Entry to Residential Aged Care. This pack included the Centrelink asset assessment form which Faye completed and sent to Centrelink.

Centrelink will verify the information in the form to calculate her level of assessable assets and the maximum bond she is eligible to pay. The maximum bond is calculated as the assessable assets less $44,000 (figure relevant for entry up to 19 March 2014).

Faye lives alone so her home is counted as an assessable asset for the bond calculations. This puts her assessable assets at $405,000. She receives a letter from Centrelink stating the maximum bond she can pay is $361,000.

A week later, Caroline receives a phone call to say that a place has become available and an appointment is made to discuss the opportunity for her mother to move in. Caroline takes the Centrelink letter to help with her negotiations.

However, this may not result in the outcome Caroline is hoping for. The facility is firm that the minimum bond is $500,000. To admit Faye, they would need to accept a lower bond. As a result, the facility withdraws their offer and offers the place to another potential resident who has a greater level of assets.

This outcome is not dissimilar to the situation with selling a house. If the seller wants a price of $500,000 and the potential buyer can only borrow enough to pay $361,000 the seller does not have to accept this price. They can choose to either drop the sale price to accept the offer or discontinue negotiations and look for a new buyer. The same has happened in this case.

Just because the legislation sets Faye’s maximum bond at $361,000 does not mean the facility has to admit her for this bond level. It just means that if they choose to admit her they do so under an agreement to accept the lower bond.

What could Faye and Caroline have done?

Let’s go back to the steps outlined earlier in this article and review how they may have applied to Faye.

Step 1 = What will it take to be offered a place?

When researching suitable facilities it is important to gain an indication of the bond level required and to understand what flexibility exists in negotiations.

This can be difficult as many facilities are reluctant to quote a bond until they have an indication of the person’s assets. The best strategy is to have an open and honest discussion with the facility. In reality, if Faye had disclosed the level of assets when she put her name on the waiting list she may never have received the call with the offer of a place.

Tip: Newer facilities are likely to be carrying higher levels of debt. This generally means higher bonds and less flexibility to accept a lower bond.

Step 2 = Can the person afford this bond?

In this case, Faye does not have sufficient assets to pay a bond of $500,000. Her family may need to consider whether they can afford to contribute part of the bond if they want to get her into this facility. But do they still have this opportunity when she already has a Centrelink assessment?

If an offer of a place is made and accepted, the person will be asked to sign a Resident Agreement. This is a legal contract between the facility and the resident. It sets out a range of issues including the agreed bond. The bond therefore needs to be paid by the resident, in this case Faye. It cannot be paid directly by anyone else to the facility as the facility is unable to enter into contracts with anyone but the resident.

One solution may be for the kids to gift or loan the money to Faye and deposit it into her bank account before she moves to the facility. She can then request a new assessment from Centrelink based on a change in her circumstances. This strategy is not guaranteed to work as we have seen cases where Centrelink have denied a request to reassess assets within a short period of time.

Gifting/loaning money into Faye’s account will increase her assessable income and assets but she has 14 days to report the change to Centrelink for pension purposes. If the bond is paid within this time it will not impact her age pension payments.

If children are looking at contributing all or part of the bond, the best option may be to not fill in the Centrelink assessment at all, or at least not until after the gift/loan is made to the parent. The Centrelink assessment is optional to obtain, although some facilities will require it before entry.

If the facility agrees, instead of obtaining a Centrelink assessment the person can sign a statutory declaration stating they have sufficient money to pay the requested bond and will be left with at least $44,000 after paying the bond.

If the money from the kids is a loan, they should seek legal advice about drawing up a loan contract so that the money can be recovered from the estate when the bond is repaid. Entering into a loan contract may only be possible if the parent still has full legal (mental) capacity.

Step 3 = Does the fee represent value for money?

While Step 2 has worked through a solution to ensure she can afford to pay the bond, Faye and her family should determine whether the bond represents value for money to them.

What other options might exist for facilities that will accept a lower bond? Are those facilities comparable or is the lower bond coming at the cost of a desirable feature? This is a personal choice and is very similar to how we choose where we will buy a house.

Supported residents

Legislation did not really help or protect Faye, but there are some protection mechanisms for people with very low levels of assets.

Every government-subsidised aged care facility is required to take a minimum number of supported residents. This quota is 15-40% of all subsidised places depending on the socio-economic demographics of the area.

Supported residents are those who have less than $113,784 (current to 19 March 2014) of assessable assets when moving into aged care. These people still need to be left with $44,000 of assets after paying a bond and may incur a lower retention amount (if the bond is less than $39,720).

It is important to understand that the quota applies across all places in the facility. If the facility has both low care and high care places the facility may only take supported residents into high care places. It can therefore still be difficult to secure a low care place even if you are a supported resident.

Helping clients understand bonds

It should also be remembered that bonds are not all bad. Helping clients to understand the implications of bonds may help them to be comfortable with paying the bond.

• Bonds are ggovernment guaranteed
• Bonds are exempt under the Centrelink/Veterans’ Affairs income and assets tests and can help to maximise age pension and minimise daily care fees
• The bond is not a true fee, but rather is a refundable deposit. Each month the facility can deduct $331 (up to a total of $19,860 over a five year period) and the rest of the bond is refundable when the resident leaves or passes away
• Bonds are held in trust by the facility – this can help to protect the estate.

The average new bond is continuing to increase and facilities currently hold over $11 billion in bonds. Bonds are payment for the right to live in the facility and residents have security of tenure for the rest of their lives.

Building your business

There is widespread recognition that clients are ageing at a rate we’ve never experienced before. Older clients and their families are thinking about their future aged care needs and are looking for services to guide the process.

This provides professionals (including financial planners, lawyers and accountants) who service clients of all ages with business growth opportunities to help clients and their families navigate through aged care decisions, to ultimately give them lifestyle choices in the latter part of their life. It also provides a great opportunity to market to pre-retirees, who are the children making the decisions for their parents.

By Louise Biti – Article current 1 December 2013 to 19 March 2014

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Disclaimer: The information contained in this publication is based on the understanding Aged Care Steps Pty Ltd has of the relevant Australian legislation as at the date shown in this publication. The information contained in this publication is of a general nature only and is intended for use by financial advisers and other licensed professionals only. It must not be handed to clients for their keeping nor can any copies of sections of this publication be given to clients. Aged Care Steps is an authorised representative of Strategy Steps Pty Ltd ABN 14130045242 AFSL 333649 and is not a registered tax agent under the Tax Agent Services Act 2009. We recommend that your client be referred to their registered tax agent or legal adviser prior to implementing any recommendations mentioned in this publication.

Note: The accreditation for this CPD article is no longer current. Please visit our CPD section for current CPD quizzes. 

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Aged care plans require plenty of communication.

Unpalatable as it may be, clients should be encouraged to have sensitive discussions with their families about aged care needs sooner rather than later if they want to avoid potential conflict and distress, as well as financial problems, says Derek McMillan, CEO of Retirement Living at Australian Unity.

“Our rapidly ageing population, increasing life expectancy, and busy lives mean that more and more Australians will need some form of assistance as they age, whether that be care in the home or residential aged care.

“As the supply of aged care services is limited, families need to consider their options in advance to avoid unnecessary stress and anxiety for themselves and their families.

“The best preparation for parents is to discuss well in advance with their children, and other involved relatives, what their preferences are and what plans may need to be made as they get older.

“These discussions should take into account what parents want to do with the family home when they are no longer able to live in it alone; what kind of facility they would like to live in; what they want to do if they can no longer drive; and even what kind of medical care they would like.

“Most of us find such issues difficult to talk about at the best of times. However, having this conversation under pressure when an immediate decision needs to be made is much more difficult, more emotional, and often a source of unhappiness.

“Therefore, families should start to talk about it well before any decisions are likely to be needed, so the discussions can be held in calm and rational manner – and most important of all, they reflect what the parents want.”

Mr McMillan said that often, people find they have very different expectations to their parents.

“For instance, we have seen adult children assume their parents didn’t want to leave the family home, when the reality was their parents couldn’t wait to move into a smaller place but hadn’t moved out because they thought their children would be upset if they sell it.

“We have also spoken to parents who assumed they would be invited to move in with one of their children who would then provide the support and care t they required, and were bitterly disappointed to find their children had no intention of taking them in.

“Having an open and frank discussion about expectations well in advance will allow better planning and help avoid the conflict that unpleasant surprises usually bring,” Mr McMillan said.

He said families should apply the “40-70” rule (after research undertaken in the US*) which recommends that when the children reach age 40 or the parents reach age 70, it’s time to have the conversation, even if the parents are still perfectly healthy and independent.

He added that a necessary component of the conversation is the finances.

“We are inundated with advertising images of retirees on caravanning trips around Australia or walking hand in hand down a beach, which might be the dream for a few years.

“But the reality is most Australians will need to plan for the cost and the probability of additional health and aged care in latter years of their retirement.

“The significant gap between the amount of funding provided by the Government to aged care and healthcare services, and the ever-increasing demand for such services resulting in potential difficulty in getting aged care accommodation, needs to be understood and planned for.

“Consequently, families will need to talk about how they will fund the care needed by ageing family members as well as how and where that care should be provided” Mr McMillan said.

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Aged care reforms

Almost a year after the Government announced its response to the Productivity Commission Report on aged care reform legislation has been introduced into Parliament to effect the proposals.

Five Bills were introduced on 13 March which will impact residents who enter residential aged care from 1 July 2014. Residents in care before this date will continue to be assessed under the old rules. If they move services, they can choose to have the new rules apply or continue to be assessed under the old rules.

The reforms will impact both residential and at-home care, with an increasing focus on providing sustainable and accessible at home services. The number of home care places will increase to almost 100,000 over the next five years with four levels of care. This is in line with many people’s desire to stay in their own homes and the difficulty with bringing new residential facilities to market.

The key areas of reform include:

• Removal of the distinction between low care and high care.
• The income-tested daily care fee will change to a means-tested care fee using both assets and income testing. These fees will be capped at the current level of $25,000 (indexed) per year and $60,000 (indexed) over a lifetime. This fee continues to be in addition to the basic daily care fee (which is set at 85% of the basic single age pension).
• Entry fees for residential care will be calculated as a fully refundable lump sum (with no retention amount) and residents will have 28 days after moving in to decide whether to pay a lump sum, periodic interest payments or a combination.
• Facilities will have greater ability to offer extra-service packages for an additional fee. These packages can be made available to all residents and residents can choose to opt-in or opt-out of these services.
• Increased funding to care for dementia patients.
• Introduce home care as a new care type to replace the current at-home packages (currently the Community Aged Care Packages (CACP) and Extended Aged Care at Home (EACH) packages).
• Home care recipients will be asked to pay a basic daily fee of up to 17.5% of the single basic age pension and may also have to pay an income-tested fee (based on income only, not assets). The income-tested fee is capped at $5,000 or $10,000 a year (depending on resident’s income) with a lifetime cap of $60,000 (indexed).
• If an aged care facility becomes insolvent and is unable to repay a bond to a departing resident the government will make the repayment. In this way, the government effectively guarantees repayment of the bonds.

New proposed legislation will allow the government to recover these amounts (plus administration costs) from aged care facilities through the charging of a levy. The levy could be charged over a number of years to minimise the impact on providers but would impose further burdens on the aged care industry.

A new Aged Care Pricing Commissioner will be established to make decisions on pricing issues for entry fees and extra-service fees. An independent review will also be schedule in 2016 with a report due on 30 June 2017 to review the effectiveness of the new rules.

A new Australian Aged Care Quality Agency will be introduced to replace the current Accreditation Agency. This new Quality Agency will be responsible for monitoring the quality of both residential and home care services.

Advice implications

• Some of these changes aim at creating better flexibility in aged care by removing complications and anomalies with the low care/high care assessment process.
• There is no reduction in care fees as daily care fee continues to apply and the means-tested care fee is capped at the current maximum limit for income-tested fees. However, residents with very long-term care needs may benefit from the lifetime cap.
• Some of the current opportunities for clients may no longer be effective for those entering care on or after 1 July 2014 due to the removal of the ability to negotiate higher bonds in exchange for fee reductions. Some income-test reduction strategies may also be less effective. At least the good news is that strategies put in place before 1 July 2014, should continue to be effective as these residents can choose to be assessed under current rules.
• Hopefully the changes provide greater clarity for residents around the negotiation of entry fees, but the full operation of this system and the impact is yet to be seen.

http://www.agedcaresteps.com.au/

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Following the Productivity Commission report on aged care, the government set up the Aged Care Financing Authority (ACFA) to provide advice on reforms and monitor pricing in the aged care industry. Recommendations for reforms to entry fees which have been endorsed by government are outlined in the table below.

The aim of the proposed pricing tiers is to allow clients to have greater transparency and confidence in the bond negotiation process. The entry fee will be quoted as a lump sum (Refundable Accommodation Deposit) and will also be converted into a Daily Accommodation Payment using the current interest rate that applies for interest payments on bonds. For the December 2012 quarter this is 7.62% pa.

Based on 2012 levels the prices for each Tier are proposed to be:

• Tier 1 – up to $50 per day (equates to lump sums up to $238,845)
• Tier 2 – between $51 and $85 per day (equates to lump sums between $238,846 and $406,036)
• Tier 3 – over $85 per day (equates to lump sums of $406,037 or higher)

These thresholds will be indexed each year at a rate to be yet decided.

Residential care facilities that invest in significant upgrades will be eligible for higher government subsidies from the current rate of $32.76 per day up to $52.84 per day from 1 July 2014.

Advice tips

• Facilities will need to publish the entry fee for all room types. They can continue to charge varying prices for various rooms. While this may allow greater transparency for clients, it means clients will not be able to negotiate bonds higher than the published rates to improve age pension entitlements.
• Bonds paid from 1 July 2014 to secure a place in residential aged care will be fully refundable.
• Clients should not shop around for a facility just based on price. They need to also consider the quality and level of staff resourcing, the convenience of the location, reputation of facility, facilities and quality of accommodation as well as the social atmosphere.

Warning: These proposals are based on media releases issued by the government. Legislation has not yet been introduced to implement the changes. The final legislation is likely to contain further details and may include amendments from these announcements.

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