Sean Howard looks at strategies advisers can use to maximise Age Pension entitlements, minimise income-tested care fees, and provide income to a person that needs home care services.
The Federal Government’s Home Care Packages Program provides subsidised home care services for older people who want to remain in their home.
Most people who require care prefer to stay in their home, however, this can be very difficult when their care needs are high and government funding is insufficient to provide the home care services needed.
How are home care packages provided?
Home care packages are offered on a consumer directed care basis. This gives recipients more choice for home care services and control over how they are delivered. Providers work in partnership with recipients to develop a home care plan which will meet their care needs.
Since 27 February 2017, new home care packages were allocated to the recipient rather than to the provider. Recipients have the ability to choose their provider and direct the government subsidies and supplements to that provider.
Once a recipient enters into a home care agreement, the provider will receive and administer the funds available under the home care package and issue recipients with monthly income and expenditure statements.
The funds available to provide home care services include both government subsidies and supplements and the recipient’s contribution.
Government subsidies and supplements
The Government is the primary source of funding for home care packages, with subsidies determined by the level of home care required. There are four levels of home care packages, with each providing different subsidies towards the total amount of funds available to meet care needs, as shown in Tables 1 and 2.
There are government supplements available to provide additional funding for specific care needs.
Recipients of a home care package may be asked to contribute a basic daily fee and an income-tested care fee towards the cost of their home care.
The basic daily fee is 17.5 per cent of the basic rate of single Age Pension and is paid by everyone who receives a home care package. The basic daily fee is indexed on 20 March and 20 September each year in line with the indexation of the Age Pension. It is currently $10.10 per day.
The income-tested care fee is determined by a recipient’s assessable income and is in addition to the basic daily fee. Assessable income includes income as assessed under Social Security rules and any Age Pension entitlement (excluding the minimum pension supplement and energy supplement).
The income-tested care fee is calculated by the Department of Human Services (DHS) and is reviewed quarterly. The amount of income-tested care fee payable reduces the amount of subsidy and primary supplements provided by the Government.
Opportunities for advice
Where a person has high care needs, the funding from their home care package may be insufficient to provide the home care services required. A Level 4 home care package provides funding of up to $145.97 per day ($53,279.05 per year).
However, the cost of home care services and additional fees charged by providers can end up being higher than this amount, resulting in a significant shortfall.
Providers can charge case management and administrative fees to develop home care plans and deliver home care services. These fees average 27 per cent of Government subsidies and supplements and reduce the amount available to provide home care services.
Opportunities exist for advisers to help people with high care needs who have a shortfall from their home care package.
Strategies that can provide income and interact efficiently with Age Pension entitlements and income-tested care fees can help fund home care and allow a person to remain in their home for as long as possible. Strategies often seen implemented include:
- Investing in term deposits and/or cash;
- Investing in term annuities;
- Investing in an Aged Care annuity; and
- Investing in an insurance bond held within a discretionary trust.
Depending on a person’s circumstances some of these strategies may require drawing down on their capital to supplement income.
Yvonne is single, 80 years old and lives in her own home worth $900,000. She has $10,000 of personal contents and $250,000 in term deposits and cash. She is suffering from dementia and requires constant 24 hour care, however she does not want to move into residential aged care. Her daughter Caroline is currently caring for her and has an enduring power of attorney.
Yvonne has been approved for a level 4 home care package, with the dementia and cognition supplement which provides funding of $58,239.40 in the first year. This includes Yvonne’s basic daily fee of $10.10 per day ($3,686.50 per year).
Caroline works three days a week and would like Yvonne to receive in-home care while she is at work during the day. This will cost $1,440 per week ($74,880 per year) and can be funded partly by her home care package. Caroline has additional expenses of $400 per week while she is caring for Yvonne.
If Yvonne receives in-home care three days a week, the shortfall from her home care package will be $16,641 and she will have a cashflow deficit of $12,787 in the first year.
Caroline seeks financial advice for Yvonne to fund the shortfall from her home care package and address her cashflow deficit. Her adviser recommends that Yvonne invest $100,000 in a term annuity to fund the shortfall from Yvonne’s home care package. Her adviser also recommends for Yvonne to invest $100,000 in an aged care annuity which will provide guaranteed income for life and a guaranteed death benefit.
This combination of investments will see Yvonne increase her cashflow by $16,550 and she will have a surplus of $3,763 in the first year. Yvonne will also increase her Age Pension entitlement by $1,502 to the maximum rate and reduce her income-tested care fee by $753 to nil in the first year.
Estate planning considerations
For many clients the estate planning considerations of investments are of significant importance.
The estate planning consequences of each of the above strategies will differ and will typically factor in the evaluation of competing strategies.
For example, with a term annuity it will generally be possible to continue to make payments to a nominated beneficiary or Yvonne’s estate to the end of the annuity term. Alternatively the remaining payments can be paid as a lump sum to nominated beneficiaries or Yvonne’s estate. An Aged Care annuity will pay out 100 per cent of the total amount invested to nominated beneficiaries or Yvonne’s estate.
Table 6 illustrates the total estate value of the two modelled scenarios above.
By indexing the payments from the term annuity, Yvonne’s estate value for the recommended strategy is lower in the first three years. However, as the payments increase in line with consumer price index (CPI), the estate value increases at a faster rate than her current situation and in the fourth year is higher. The benefits of the recommended strategy will result in a higher estate value of $6,710 after six years.
It can be very difficult for a person with high care needs to stay in their home where the funding from their home care package is insufficient to provide the home care services required. Financial advisers can implement strategies that maximise
Age Pension entitlements, minimise income-tested care fees and provide income to fund the shortfall and ultimately help a person to remain at home.
Sean Howard is technical services manager at Challenger.