Being acutely aware of the challenges faced by providers of age care services, it is abundantly clear that most people are completely unprepared for the move into such facilities from both a personal and financial perspective. In this article we explore the challenge of funding aged care with the view to getting people thinking about it now rather than waiting until the move is imminent.
There are already over one million retirees accessing aged care services in Australia. The move to aged care for a family member can be a very difficult process as the increasing cost structure raises questions as to the funding mechanism especially as the individual typically has strong ties to the family home. The costs of residential aged care are multifaceted and generally involve one or more of the following fees:
- a basic daily fee
- a means-tested care fee
- an accommodation payment
- fees for extra or additional optional services
The costs are mean
The cost of aged care is means tested and from 1 July 2014 with individuals having to complete and lodge an income and assets assessment form to determine what they pay. For a member of a couple, half of your combined income and assets are considered in the income and assets assessment, regardless of which partner earns the income or owns the assets.
Meeting the costs
Some of the potential ways to free up capital to meet the cost is by selling the family home; however this becomes a significant problem where only one partner will be moving into care or where there is strong demand from the parent to retain the family home.
Such situations are seeing the children often needing to ‘chip in’ to help fund their parents’ needs requiring a significant capital drawdown both initially and on an ongoing basis. This potentially changes the investment strategy and positioning of client portfolios given the need for additional capital and the implications on the longevity of their own asset base.
An alternative to the kids chipping in whilst keeping the family home is to use a reverse mortgage. These are loans which allow you to extract some of the equity against the house. The loan interest is capitalised meaning the loan size increases but there is no interest payments required to the lender. Importantly irrespective of what the loan grows too, the bank is unable to demand its money back until the asset is sold or the individual dies. Given the bank’s limited recourse on the asset, they are typically only willing to lend a lower percentage of the property value. For many the thought of using debt to meet the cost of aged care would only be a final resort once other alternatives are exhausted.
Importantly in meeting the cost of age care there is government support for those with limited personal resources. As a result there are also strategies in which assets and income can be reduced to low enough levels before the move so that the government may subsidise accommodation. As a result the accommodation cost may be cheaper but this may be accompanied by a loss of choice and control in other aspects. For example it may mean accepting a place in whichever facility has a low-means place available and that place may be in a shared room.