Aged care advice – The $46,000 rule. A subtle point but significant issue

From an article by Rahul Singh (Tech Services Manager @ ANZ)

There is a legislative rule relating to paying aged care fees which to me stands out as often bringing unintended consequences. The Government arguably intended the rule to operate as providing protection to clients in leaving them with minimum assets (currently $46,000) after paying for their accommodation as a lump sum – herein referred to as the $46,000 rule. However, in situations involving couples, it can often lead to unnecessary interest costs on unpaid Refundable Accommodation Deposits (RADs).

While the issue can be easily overcome by helping our clients navigating the maze that is aged care, it is not widely understood. Being aware of how clients structure their accommodation payment enables us in adding value in providing aged care advice and assisting our clients in minimising aged care fees.

Consider a situation.

Jim is married to Nola. They own their home. Unfortunately, Jim’s health has been deteriorating with onset of dementia and Nola with her own frailties can no longer provide the care he needs. The decision has been made by the family for Jim to be cared on a full time basis in a residential aged care facility.

Besides the family home (which is exempt because Nola lives in it), the only other assets they have are $600,000 in a term deposit which they recently received as an inheritance and $30,000 in car and contents. The family has been quoted a Refundable accommodation deposit (RAD) of $500,000 by the facility.

What is the issue?

The aged care means testing takes into account only 50% of the combined assets and income. This means that even though Jim and Nola’s combined assets are $630,000, Jim’s share is $315,000.

So can he pay the $500,000 RAD?

One would logically think there should not be an impediment given they as a couple have $630,000 in assets. Surprisingly, and this was the case even before 1 July 2014, there is a barrier in Jim paying the full RAD.  Remember, his share of the assets is $315,000. The issue has been exacerbated since 1 July 2014 due to many providers not bringing the RAD price down with a resident’s assets. For example, pre 1 July 2014, if Jim’s assets were the $315,000, then many providers would have adjusted the accommodation bond from $500,000 to $269,000 ($315,000 – $46,000).

Worth noting, any of the RAD which is not paid in full incurs government prescribed interest rate of 6.14% (current rate to 31 December 2015).

Unfortunately, under the current rules, unless the facility adjusts the RAD price down to bring it in line with Jim’s assets (which seems to be rarer now), he would need to pay the advertised RAD of $500,000 or an equivalent periodical payment. Jim is required to enter into an accommodation agreement with the facility within 28 days of entering, confirming how he is going to pay the $500,000 accommodation payment. As he must be left with $46,000 in assets, he is only allowed to pay $269,000 as a RAD. On the remaining $231,000 he must pay interest at the rate of 6.14% – $14,183 annually referred to as Daily Accommodation Payment (DAP).

Unless the couple were earning more than 6.14% on their other assets or had other plans with the funds, this means the 6.14% interest cost is an unnecessary cost. In the absence of the $46,000 rule, Jim and Nola would have preferred to pay as much of $500,000 as a lump sum.

What can be done?

The solution was open to some debate when the rules came in on 1 July 2014. Upon request, Department of Social Services (DSS) had issued unpublished guidance to some practitioners but until recently there was nothing in the public domain.

So what is the solution?

DSS have confirmed that a resident is not subject to the $46,000 rule once the 28 day period expires. The solution here would be to pay the RAD of $269,000 upfront, pay approximately 1/12 of the annual interest cost of $14,183 for the initial 28 day period. As soon as the 28 day period expires, the remaining $231,000 of the unpaid $500,000 RAD is paid.

Given low interest rates, assuming clients were earning 2.5% on the Term Deposit, the differential between 6.14% and 2.5 %, there is a saving of 3.64% – saving Jim and Nola approximately $7,000 in unnecessary interest costs (taking into account the interest payment for first 28 days). Worth noting, that there is always going to be the differential between the two rates, given that the aged care interest rate is based on General Interest Charge (currently 9.14%) minus 3%.

We haven’t even touched on social security entitlements but given the exempt status of RAD, exchanging assessable deemed assets to the exempt RAD would naturally also help with increasing social security entitlements.  From 1 January 2017, the social security advantages of exchanging assessable assets to RAD will be further magnified given the increased tapering rate from current $1.50 to $3.

Being aware of how we can navigate around the $46,000 rule adds another strategy to the toolkit in adding value to our clients’ situation.

Low Fees overpowering Common Sense?

It is over, we lost, low fees have won. Nothing else matters.

A disturbing distortion of reality is entering into the headspace of a few superannuation executives, product designers, investment leaders and even regulators.

If it isn’t stopped soon the financial damage it will cause to Aussie superannuation savers is going to be disastrous for everyone, well everyone except maybe lawyers who will be kept busy with consumer complaints.

That low fees are all that counts and that returns don’t matter is plain misguided and simply wrong. If investors performance is secondary to just keeping costs down, some part of the previous services on offer have to be missing to deliver on the low cost model.

How have we ended up in this position? Could it be the over exaggerated focus on combating what is perceived as high fees without understanding the key differences as to why one fund may be charging more than another? Not all funds have the same style of management, and not all funds invest in the same assets. Costs have to be different. In a basic demonstration those with an agenda will put forward that that high fees could detract from high returns. But this assumes the performance of the assets and the managers in the fund is the same as another fund charging less – but this is not a given outcome. What if the manager with the higher fees is more active and is generating return well in excess of the extra fees being paid?

Sustainable good returns are hard to achieve year in year out, we also know that past return are no predictor of future returns. But does this mean that we should ignore this vitally important aspect of our retirement growth. Superior returns do not materialise all on their own. Someone has to do the research. Someone has to get paid for this. This allows a measure of predictability as from the management styles we can reliably predict who will be next year’s strong performers from a management perspective.

So whilst the regulators would like us all to assume that low cost means getting more out of your superannuation when you retire, this could not be further from the truth. Sorry to say!

Then we have the argument that funds should try to be as low cost as they can because every decent fund uses the same asset consultants, with broadly the same investment strategy, and assembled around similar bunches of investment managers.

If any proof is needed just look at last financial year’s government inspired ‘MySuper’ returns. The variation in returns between the top performers that pulled in 12% and the bottom returners that scored 6% was a staggering 600 basis points – a full six-times bigger than the normal 100 basis point best-to-worst fee gap.

Low fees are of course a fantastic outcome of the reforms that have been inflicted on the superannuation industry these past few years and fund members have been unequivocal winners.

But what’s making them winners is not the low fees, it’s that when their fund delivers solid returns they only need to slice off those lower fees which means more money remaining in their accounts.

Low fees in themselves are like lipstick on a pig.

Then there’s that ‘group’ who only focus on ‘lower fees’ suggesting that returns are irrelevant. Maybe that is because they know they can’t deliver them with any regularity! If this is true, why don’t these ‘fund managers’ hand their clients funds to professional fund managers who can deliver, rather than trying to cloud the issue with more and more complex reasons and products designed to hide this simple truth.

I hope fund members are reading up and listening to these conversations so that by the time award super is opened up to competition following the coming FSI reforms they can make smart tough decisions about their long term best interests.

Achieving respectable and competitive investment returns isn’t the only thing super funds have to do, but without them not much of the rest really matters.

Thinking of buying your first home?

As of the 03 October 2015, the First Home Owner Grant of up to $3,000 for the purchase of established homes in Western Australia has been removed.

The first home owner grant (FHOG) is a one-off grant payable to first home owners that satisfy all the eligibility criteria.

The 2015-16 State Budget included a measure to abolish the FHOG of up to $3,000 for the purchase of established homes.

This change will apply to contracts for the purchase of an established home entered into on or after 3 October 2015.  First home owners who entered into a contract to purchase an existing home before that date will still be able to apply for and receive the FHOG and related first home owner rate of duty for a period of 12 months after completion of the eligible contract.

On or after 3 October 2015, purchasers of established homes will still be able to apply for the first home owner rate of duty if the value of the home is below the current threshold of $530,000.

The FHOG of up to $10,000 for ‘new’ homes will remain unchanged.

More information is available from the Department of Finance, Government of Western Australia here.

First Home Owner Rate of Transfer Duty

A person who qualifies for a FHOG, or a person who would qualify for a FHOG had the transaction been an eligible transaction, or is an Indian Ocean Territory resident, may be entitled to a FHOR of duty on the transfer, or agreement to transfer (i.e. the contract for sale), in respect of the acquisition of the home or vacant land.