How to fund the increasing cost of aged care is a hard but necessary conversation to have with clients, says the head of a Sydney boutique independent financial advice firm.
Crystal Wealth Partners executive director Tim Wedd tells Wealth Professional
one of the key planning issues for retirees increasingly will be the cost of aged care facilities – and whether to pay through lump sum ‘accommodation bonds’ or ongoing payments.
As such investments cannot be made from within super, it comes down to considering the two most significant assets left behind for most retirees at that time: the family home and their remaining super assets, he says.
The Living Longer Living Better
aged care reform package was announced on 20 April, 2012, and Wedd doubts it will be amended by the Liberal government. The changes are scheduled to come into force on 1 July this year.
Changes will most affect the self-funded retiree and will mean retirement costs more, as “nothing’s getting cheaper”, points out Wedd.
Advisers should be aware of the changes and talk through them with clients, especially whether they will need to sell or rent their family home to stay in an aged care facility, says Wedd.
“Often clients come in and are not thinking it’s an issue; whether they’ll have to rent or sell their home to fund aged care. It’s a difficult conversation to have – whether they would rent out their home to others while they are living in an aged care facility. But it’s something that needs to be talked about.”
With an ageing population it is a conversation advisers will increasingly need to have with their clients.
“In the past, it has been seen as a side issue. Even if you are not seeing it now, over the next 10 years there’ll be a fairly significant wave and there are implications as to how to structure finances to deal with it,” says Wedd.
There is a big range in the price of aged care facilities. While a full age pensioner will pay 85% of the aged pension into care, which is around $20,000 a year, a luxury aged care facility could cost $80,000 a year. “It’s quite a variation,” he says.
Financial plan not all about the client
- If a spouse remains in the family home, the value of the home will be exempt for assets testing, which can help to lower the amount of bond required. However, this may mean drawing down funds from remaining super to pay for the bond.
- But if the home is rented out, then a bond can be paid periodically to lessen the impact of paying large initial lump sums.
- Any net rental payments are exempt from the ongoing income testing of daily care fees and for aged pension income testing purposes, too. The value of the home would also be exempt under the age pension assets test while it is rented out to pay the bond.
- Perhaps the family home could be sold earlier and the retiree downsizes in order to get surplus cash to invest in super before age 75.
- If funds are not readily available to pay an accommodation bond and they want to keep the family home, another option would be to borrow against the home to pay the relevant accommodation payment.
- However, the ramifications of this should be assessed carefully.
The conversation advisers need to have
Decision time for advisers