Nobody likes paying more than they have to for anything but with aged care, paying extra can have its benefits. Paying more than the minimum accommodation bond to an aged care facility is becoming a common strategy because it’s a way for pensioners to hang on to their pension.
For Centrelink purposes, an accommodation bond is exempt from the means tests, therefore it doesn’t affect the age pension.
Aged care facilities also charge a basic daily care fee and may charge a daily income-tested fee, which are determined by the Department of Health and Ageing.
The daily care fee depends on one’s pension status, while the income-tested fee is determined by income as assessed by Centrelink. Full pensioners will not pay an income-tested fee.
An accommodation bond, which is paid when someone is entering a low-care facility or a high-care facility with extra services, is really an interest-free loan to a facility.
Aged care operators are permitted to retain a maximum of $19,380 over five years, with the rest being returned to the resident or their estate when they leave the facility.
The amount of bond that someone pays is currently negotiable with the facility. The average for a bed in a metropolitan facility is about $350,000.
While most facilities generally prefer a lump sum payment by the prospective resident or their family, they can also negotiate to make periodic payments with interest.
Lifetime Planning financial planner Anna Lawton says that, depending on an individual’s circumstances, paying a higher bond may be a good idea but the resident should, in return, have their fees reduced to make it worthwhile.
She says that without a fee reduction, the best return they get is by way of an increased age pension. For example, if you get an increase of 2.2 per cent in the age pension, your income-tested fee would reduce by 0.9375 per cent.
Lawton says that, without a reduction in fees for the extra bond payment, some people may be better off taking the slightly reduced pension and putting their money in a term deposit where a good rate for three years is currently 4 per cent.
Sadly, a higher interest rate environment is a better time for aged care operators to accept extra bond payments for reduced fees because it allows them to earn more on the money they invest.
“Now that interest rates are low, I would rather have the higher service fee than the 5 per cent I could earn on your money,” says Lynden Aged Care chief executive Ann Turnbull.
Under reforms proposed in the government’s Living Longer, Living Better aged care program, Turnbull says, facilities may not be able to accept extra bond payments. The idea is that a new financing authority will tell facilities the maximum bond they can charge people.
Specialist aged care financial adviser Val Nigol says a further area of uncertainty for prospective residents paying an extra accommodation bond is the proposed removal of the government guarantee of accommodation bonds.
A key concern for Nigol, principal of Financial Freedom Solutions, is whether the withdrawal of the guarantee makes an accommodation bond more risky, particularly where bond monies are used for capital expenditure purposes by the aged care facility and cannot be accessed quickly to repay a resident or their estate.
It might be that prospective residents are advised not to go into permanent residential care (for as long as possible) so that they can avoid paying the bond and putting their money at risk, says Nigol.
He says that if an aged care provider was required to provide a guarantee, as contemplated by the government’s review, the provider, in turn, may need to obtain one from a commercial bank. Any guarantee fee charged to a provider by a bank would most likely be passed on to the resident paying the bond.
“A resident could well be advised not to go into permanent care, not be obliged to pay a bond into care and use the at-home care options,” says Nigol.
Ann Turnbull says changes introduced by the Department of Health and Ageing in October in 2011 mean there are already clearer and stronger arrangements to protect residents’ savings held in accommodation bonds.
Where previously operators could use the bonds for multiple purposes, there are now strict guidelines covering the uses and investments that can be made.
“Under the new rules, it largely restricts you to putting the money in a term deposit,” she says.
Permitted uses for a resident’s bond include capital expenditure, refunding bonds, refunding debt accrued for capital expenditure and refunds, investment in particular financial products, and loans for capital works or investment in particular financial products.
Turnbull says the arrangements clarify the intended purpose for bonds as a source of capital for investment in aged care infrastructure.
They also aim to improve governance arrangements for bonds and provide greater transparency and accountability for bonds.