Is it worthwhile paying a higher bond to a nursing home?

John Wasiliev

Reader’s question: My aunt is in standard high-level nursing care and I’m looking after her affairs. She receives a full age pension and pays, as part of her nursing home fees, an income-tested fee of $7.38 a day.

On her behalf, I have sold her unit and she will receive a $400,000 settlement. This will affect her age pension as well as her income-tested fee.

Her nursing home made a suggestion that she can improve her pension and upgrade her care with extra services if I give them a substantial amount of her cash.

Further, they will waive her extra services fee with the amount dependent on how much cash is handed over. How would this weigh up as opposed to investing the $400,000?

One’s wishes when moving into a nursing home should really be sorted out in advance, in fairness to family or relatives, says Alex Denham, a senior adviser with Dartnall Advisers in the NSW southern highlands, a location where many people choose to retire. It takes time to know what is involved.

Other income

For instance, Denham says, you say your aunt receives the full pension but also pays an income-tested fee. A full pensioner cannot be asked to pay an income-tested fee (which is a contribution to her care). This suggests she’s receiving other income, perhaps a superannuation pension or income from savings.

The suggestion that some of the proceeds of her home be deposited with the nursing home relates to the accommodation bond that residents are asked to pay. These amounts are generally determined when you enter nursing care but there can be times when paying a higher bond is worthwhile. This includes when you receive a large lump sum from a home sale. This can change a retiree’s situation from full age pension to part pension status.

Extra services

The extra bond (which is an interest-free loan to the nursing care provider) is exempt from any government pension means testing. A part age pension can therefore be improved and the income-tested fee reduced. Being offered extra services should give your aunt a higher level of accommodation and food at a higher fee.

So is the value of extra services worth any improved benefits gained from investing the home sale proceeds?

By way of example, consider a single non-home owner retiree with $400,000 in cash, where the first $45,400 is deemed under the Centrelink income test to earn 3 per cent and the balance 4.5 per cent. Deeming encourages retirees to invest for a better return. Reducing deemed investments by $100,000 can improve the age pension by $2250 a year and decrease the income-tested fee by about $938 a year. The total improved benefits are $3188 a year, or about 3.2 per cent of the $100,000, plus the extra services your aunt receives.

Grass is greener?

So can a better outcome be achieved for your aunt by investing the money?

The answer depends on the investment return. Let’s say that with the savings in the extra services fee, the total improved benefit is 4 per cent per $100,000 invested. Can a term deposit beat that? Maybe not, but a portfolio of defensive Australian shares paying fully franked dividends may. The answer could be a mix of paying some extra bond and investing the rest. It will vary with individual needs plus your desire to be a more active investor for your aunt.

Unfortunately, no Australian annuities provider offers deferred lifetime annuities because of impediments in superannuation laws, says Stuart Barton of annuities provider Challenger.

Existing laws only offer concessions where retirement income products pay a minimum pension every year. This means deferred annuities (where payments are delayed) are not feasible. But a number of organisations have asked the government to address these impediments and it is understood they have been discussed by the Superannuation Roundtable, a government-industry group considering ideas to provide more options in retirement.

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