By Allison Tait, ninemsn Finance
If you're younger than 50, the idea of retiring, retirement villages, nursing homes and even old age all seem like a very long way away. Filed with "superannuation" in the To Be Thought About Later file. Unfortunately, however, the reality of all these things may be visited upon you much sooner than you expect; and usually very suddenly.
"In the next 20 years, the number of Australians over 70 is expected to be around 4 million," says Brendan Burwood, managing director of Ipac Financial Care, a company specialising in aged-care personal finance. "There will be many more people moving into the aged-care system in the near future."
While this may not be you personally, it's very likely to be your parents and, unless they're very well prepared, it means a lot of decisions to be made all at once.
"I started Ipac Financial Care when my grandparents went into care," Burwood says. "I observed just how complex and confusing the system is, and how emotional it is for the family. It's such a large financial decision; selecting a facility, hoping a bed is available, working through the financial implications; and it's such a sad time. You wouldn't take any other big financial decision in life under such pressure."
Part of the problem is that the aged-care system has a unique set of fees and charges; most of which you never hear of unless you're in that situation. And they're significant.
"If you're moving in a low-care residential aged-care facility, the charge an accommodation bond, which is refunded when a person leaves the facility. So you get it back, but it's still, conservatively, $200,000 or even up to $1 million, depending on the facility," Burwood says. "Raising it often requires people to sell an asset; and that's usually the family home."
People in low-care facilities are also required to pay a daily fee to cover care costs.
So you're dealing with fees that are not only foreign, but significant, and there's all the emotional turbulence in the background of not only potentially selling the family home, but dealing with the complex emotions that come with watching a family member; usually a parent; lose their independence.
Cutting through all of that requires a plan.
Where to start
"The biggest financial issue for most elderly people transitioning to an aged-care facility is coming up with the lump sum accommodation bond for low-care aged care," says Stephen Page, a financial information services officer for Centrelink. "They are measured as having to pay if they have assets above a certain sum; and if they're leaving the house, the house is included."
Those entering a high-care facility do not pay the lump sum accommodation bond, but they are charged an additional daily fee. "This fee can be more than their income, unless they use the assets that are responsible for the charge; so renting out their home, or selling it)," Page says.
He agrees that the biggest source of confusion for people are the aged-care fees. "The cost structure is confusing," Page says. "The only fee that is not set by the Department of Health and Ageing is the lump sum accommodation bond." The department uses information determined under the Social Security Act to set its fees.
Both Burwood and Page agree that there is a lot of information available to people wanting to find out more about how it all works; but cutting through to determine just how it will affect your particular case is not easy.
"One of the biggest mistakes people make is not getting help to understand all the ramifications," Page says. "There are special rules on how we treat someone's home in an aged-care situation. Centrelink provides financial advisors as a free service, so that I can go through all the options with them. When people come to see me, I am a Centrelink employee, but I'm not doing Centrelink business."
Walk, don't run
For Burwood, many elderly people are so worried about the status of their pension that it leads them into bad decisions.
"It's very rational; it's the only cash flow they've had for a long period of time and they rely on it heavily," Burwood says. "But there are times when alternative strategies can be presented that might be a better way. At this stage of life, they don't want complications. It's stability they're looking for."
Having said that, rushing into decisions can have long-term effects on the pension that can be avoided.
"Selling the family home to fund the accommodation bond, for example, and then putting any surplus into a term deposit, may not be the right decision," Burwood says.
"The family home is exempt from Centrelink's assets assessments; but the surplus, plus any interest earned, is not. So that can result in, perhaps, a dip in the elderly person's pension, as well as an increase in her income-tested fees."
This scenario, he says, can be easily corrected with the right advice. "Using a family trust and insurance bonds is one way, as can negotiating with the facility to pay a higher bond for a reduction in fees," Burwood says.
For Burwood, the key is to ensure there's a net cash flow so that the elderly person feels they have enough money. "It removes the anxiety of running out of money and keeps the dignity about care as high as possible," he says.
The worst part about aged care finance concerns is that they usually happen in a hurry. "It's not usually a choice," Burwood says. "There's often a trigger event, which means the elderly person can't stay in their home any longer. Preparation, therefore, is the key."
He suggests ensuring that wills are updated and that an enduring power of attorney is put in place, giving a trusted person the authority to make decisions quickly on behalf of the elderly person.
"Also, get an aged-care assessment team assessment in place; it's free and is valid for 12 months," he says.
The assessment is required before a person can enter an aged-care facility.
Visiting facilities in your local area at open days, or through appointments, means you have an idea of what's out there and you are not making decisions under pressure.
Organise an interview with a financial services officer at Centrelink. "It's a good idea to look ahead," Page says. "It can be the potential resident, a family member, or both. It gives us an opportunity to look at the options, cost the options and start planning."
Page suggests that people seek independent financial advice as well, particularly if you're selling a home and there may be a substantial surplus after the lump sum accommodation bond is paid.
Burwood suggests looking for someone with experience in aged-care finance. "The best thing about getting advice is that you're going to people who are doing this every day. They can set up a plan, present some strategies and get some guidelines in place," he says. A free guide at www.ipac.com.au (aged care) consolidates a lot of the available information and is an excellent place to begin.
"The thing I try to remind clients is that, whilst it feels overwhelming, you can get through this," Burwood says. "With the right assistance, you can get through it in a way that feels like you've looked at every option and made the right call."
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