We’ve previously written about how the government’s Pension Loans Scheme (PLS) can assist with topping-up the government’s in-home care funding packages, but recently we’ve been receiving a number of requests from both prospective clients and advisers about how the PLS can assist in funding residential aged care requirements.
Moving into residential aged care is already a traumatic and stressful time not just for the person moving into care but for the whole family. Finding a suitable place can be challenging enough as it usually needs to happen in very short timeframes and unfortunately, the funding of residential aged care places can be complex, adding to the anxiety.
Danni Dixon, Financial Adviser at Alteris Lifestyle and Care, specialises in helping families make a confident and informed choice regarding their aged care options. We asked Danni to explain the costs of Residential Care and she highlighted the following.
When moving into residential aged care, families are faced with numerous costs that include:
The accommodation payment can be funded in numerous ways:
The RAD is fully refundable upon departing the aged care facility and is guaranteed by the Commonwealth Government.
The DAP is the daily interest payment on any unpaid accommodation costs. The interest rate (called MPIR) is set by the government and is fixed at the date of entry to permanent care. The current interest rate is 4.04% per annum.
Clients commonly ask us how they should pay their accommodation and ongoing care costs when a loved one enters care. Often, the answer will depend on the resident’s financial assets, their cashflow requirements, the plan for the family home and their future wishes.
As the PLS does not provide lump sum payments that could be used to pay a RAD, we have looked at two scenarios that showcase how the PLS may be used to supplement income and help fund ongoing expenses including aged care costs where the family home is kept.
Bill and Beverley’s case study
Bill (85) and Beverley (83) are part pensioners living in Sydney and Bill now requires residential care. Their chosen facility has an accommodation payment of $450,000. The facility also provides additional services totalling $20 per day.
They have $550,000 in cash and savings and would like to use $450,000 to pay Bill’s accommodation payment as a lump sum RAD and maintain cash in reserve of $100,000. Their home, which they own outright, is worth $1.4 million1 and they have personal assets of around $10,000.
Beverley estimates that she will need $35,000 to fund her ongoing living expenses and costs to maintain the home. Once Bill permanently enters care and pays the RAD, his ongoing aged care costs will total approximately $27,613 per year (this includes the basic daily care fee, means tested care fee and additional services).
Bill and Beverley’s pension entitlements will increase to the maximum full age pension for single people of $49,540, as they will now be considered a couple separated by illness and paid under the higher rate of pension. This will leave Beverley with $21,927 per annum to fund her ongoing expenses – excluding any interest on their savings this is $13,073 per annum less than what is required.
Under the PLS they can access a further $952 per fortnight (extra $24,770 per year) to help top-up their income. Using the PLS, they chose to draw down $503 per fortnight ($13,078 per annum) to supplement their combined pension income and cover both Bill’s ongoing care costs and Beverley’s living expenses and cost to maintain the family home.
The chart below shows their projected PLS loan and net equity in their home over 10 years.
This forecasts2 that if Bill lives to age 88 then they would still have 95% or $1. 63 million net equity in the home. If Bill lived to age 93 then there would be 90% or $1.88 million net equity in the home remaining.
Jan’s case study
Jan (89) is a full age pensioner living in Melbourne and requires permanent residential aged care. She owns her unit outright and it is worth $570,000 . Jan does not want to sell or rent
her unit to fund her accommodation or ongoing care costs because she wishes to leave her home to her children. Jan’s only other assets are $75,000 in savings and personal assets of $2,000.
Jan’s accommodation payment at her chosen Aged Care facility is $400,000 and she elects to pay this as a Daily Accommodation Payment (DAP) of $44.27 per day. This is in addition to the Basic Daily Care fee of $52.71 per day, and a Means tested care fee of $2.12 per day. In total Jan’s fortnightly aged care costs are $1,387.40 and her age pension totals $952.70 per fortnight.
Using the PLS, Jan elects to draw down the maximum amount of $476 per fortnight to top up her income and cover her aged care costs as well help cover some of the cost to maintain her home.
The chart below shows Jan’s projected PLS loan and net equity in her home over 10 years.
This forecasts4 that if Jan lives to age 99 that she would still have 77% or $533,000 net equity in her unit to be left to her children.
A complication for Jan is that in two years time, the value of her home will be counted as an assessable asset for her age pension which will likely result in a reduction of her age pension benefits (note: not included in the projections above). At that stage, Jan has the option to increase her draw down from the PLS (currently the maximum is $1,429 per fortnight less whatever age pension is received), should she wish to keep her family home. This can offset any reduction in her age pension as shown in the table below.
What these case studies highlight is that the PLS not only plays a supporting role in the Government’s policy of assisting seniors to age in their homes, more relevantly, it demonstrates how seniors who are in need of care and assistance can fund the help they need by releasing some of the equity in their home.
If you’re in a similar situation to either Bill and Beverley or Jan and would like us to run the numbers for you so you know what your options are when it comes to the PLS, contact us today. You can contact us either via phone 1300 BOOSTNOW (1300 266 786) Mon-Fri, 9am - 5pm or click on the button below to be taken to our contact page where you can fill in our online enquiry form (you’ll find it at the bottom of the page).
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1Source: Domain House Price Report June Quarter 2021 - Sydney Median House Price = $1,410,133
2Projection assumptions: Property price growth of 3% pa; PLS interest rate of 4.50% pa; CPI of 2% pa; starting home value of $1.40 million; drawing $503 PLS per fortnight (inflation linked) and spending all of the funds drawn
3Source: Domain House Price Report June Quarter 2021 - Melbourne Median Unit Price = $572,793
4 Projection assumptions: Property price growth of 3% pa; PLS interest rate of 4.50% pa; CPI of 2% pa; starting home value of $570,000; drawing maximum PLS of $476 per fortnight (inflation linked) and spending all of the funds drawn and no change to age pension entitlement after 2 years.
5 Single full age pension rate as at 25 August 2021