Annuities and aged care

Annuities and aged care

Annuities and aged care

The costs associated with aged care facilities such as nursing homes and hostels are very complex and can vary significantly depending on a person’s level of income and assets. Although there are many rules and regulations surrounding the costs, there may be the opportunity to reduce aged care fees and maximise Centrelink or Department of Veteran Affairs (DVA) benefits with the use of an annuity.

The main fees payable by residents can be summarised as follows:

Accommodation payments – In the form of an accommodation bond or an accommodation charge.

Basic daily fees – Payable by all residents. The maximum basic daily fee is set at 84% of the single base rate of pension for residents who entered an aged care home on or after 20 September 2009.

Income tested fee – May be payable by residents that are either part-pensioners or self-funded retirees and is based on a resident’s level of income.

It is the income tested fee that may be reduced by the use of an annuity.

Income tested fee

The amount of income tested fee payable is based on the residents’ level of income and capped at an amount set by the Department of Health and Ageing. It is calculated using the following formula:

(‘Total fortnightly assessable income’ – ‘total fortnightly assessable income free area’) x 5/12

Where:

  • Total assessable income includes income as assessed by Centrelink PLUS any Government income support payment (such as the Age or Service Pension) or income support supplement.
  • Total assessable income free area is an amount provided by the Department of Health and Ageing.

As the income test uses the same rules as for Centrelink or DVA means tested pensions, there may be the opportunity to reduce this fee and potentially enhance the pension at the same time.

How an annuity can help?

A long term annuity is 100% asset tested, however it generally has favourable income test treatment over deeming[1]. For an annuity to be considered long term, it must be a minimum term of six years, as anything less than this is deemed (unless the client’s life expectancy (LE) is less than six years in which case their LE rounded up can be used). The income test on these income streams is:

Gross payment – deductible amount

Where deductible amount is calculated as:

Purchase Price – Residual Capital Value

                       Term

 

Case study

Betty (82 years old) is a single non-homeowner who has recently entered a hostel facility. She paid an accommodation bond of $200,000 and is left with $320,000 in financial investments. She is currently receiving an Age Pension of $14,046 annually based on the income test. Her annual aged care fees are $16,618 (including the basic daily fee and the income tested fee).

Betty’s family decide to see an adviser who recommends allocating 30% of her portfolio to an annuity. She purchases a six year, 3% indexed annuity for $96,000 with no residual capital value. The income in the first year is $17,401[2]. The deductible amount of the annuity is $16,000 ($96,000/6) which means that only $1,401 is assessed as income in the first year.

As a result of purchasing the annuity Betty’s Age Pension increases to $15,506 and her aged care fees reduce to $16,010. This represents a saving of $2,068 in the first year. This is 2.15% of the $96,000 purchase price. The earning rate of the annuity in this case is 5.36%. In effect we have added 2.15% to the annuity rate in the first year and uplifted it to 7.51%. Not a bad return when you consider it is guaranteed and indexed to protect against inflation.

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Disclaimer

The information in this update is current as at 13 July 2011 and is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger Life), the issuer of Challenger annuities. It is provided for information purposes only and is not intended to be financial product advice. It does not take into account any person’s objectives, financial situation and needs. Before deciding whether to acquire or continue to hold an annuity, it is important to consider these matters of the current product disclosure statement (PDS) for the applicable annuity (available from www.challenger.com.au) and the appropriateness of the annuity (including the risks) to your circumstances. Past performance is not a reliable indicator of future performance. Scenarios, examples, case studies and comparisons shown in this update are for illustrative purposes only. They should not be relied on by individuals when they make investment decisions. Additionally, Challenger is not authorised to give taxation or social security advice. It is strongly recommended that investors obtain professional advice (including taxation and social security advice, if applicable) before making a retirement investment decision. Certain statements in this booklet relate to future matters. Forward looking statements involve known and unknown risks, uncertainties, assumptions and other important factors that could cause the actual results, performance or achievement to be materially different from those expressed or implied in this booklet. Neither the Challenger Group nor any company within the Challenger Group guarantees the performance of Challenger Life’s obligations or assumes any obligations in respect of annuities issued by Challenger Life. In preparing this update, Challenger Life has relied on publicly available information and sources believed to be reliable, however, this information has not been independently verified. While due care and attention has been exercised in preparing this update, to the maximum extent permitted by law, Challenger Life gives no representation or warranty (express or implied) as to its completeness or reliability. Where a person acquires or holds annuities, Challenger Life and its related parties will receive the fees and/or other benefits disclosed in the relevant PDS. Neither Challenger Life, its related entities nor their employees receive any specific remuneration for any advice provided. Financial advisers however, may receive fees or commission if they provide advice to you or arrange for you to invest in a Challenger annuity. Some or all of Challenger Group companies and their directors may benefit from fees, commissions and other benefits received by another group company.

[1] Under deeming rules, an assumption is made that financial investments earn a certain amount of income regardless of the income they actually earn.

[2] Challenger annuity quote 13/07/2011, 6 year, 3% indexed, nil residual capital value, 3.3% upfront adviser fee

 

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