Moving out of your home can be daunting and it’s not made any easier by the multitude of financing arrangements for retirement villages and aged care facilities. 
 
Story Barbara Drury 
 
As baby boomers begin to slip out of their designer suits and into the comfy leisurewear of retirement, demand for retirement villages and residential aged care, and the cost of providing it, is set to go through the roof. Not only are the boomers likely to demand more creative solutions for retirement living, but more creative ways of paying for it. 
 
There are close to two million Australians over the age of 70 and the number is set to double within the next 20 years. 
 
Grant Thornton national aged care practice director Cam Ansell believes the retirement housing sector is poised for major change as the baby boomers begin to shift into retirement with a bang, not a whimper. “Most people in accommodation at the moment are the pre-World War II generation who are happier to accept less than the baby boomers will accept,” says Ansell. 
 
“Over the last 10 years, retirement villages have begun to look different – they have restaurants, cafes and lifestyle features that make them look more like communities,” says Ansell. The trend is to bigger villages with everything on site, so a nursing home may be incorporated that looks like the rest of the village. 
 
Derek McMillan of Australian Unity retirement living services agrees that consumer preferences are changing. “People are looking to stay in their own home so they can live independently for as long as possible,” says McMillan. 
 
This is increasing demand for services delivered to the home, where home is either the family home or a retirement village. Paying for help with the shopping, washing, cleaning and even some meals is becoming common. 
 
McMillan sees the retirement village sector fragmenting, with some villages catering to older people with additional services and others for younger retirees offering lifestyle features such as golf courses. 
 
Australian Unity for instance has inner city premium villages with 24-hour concierges and fees that reflect the higher level of services offered. He thinks in future we will see inner city apartment blocks converted into retirement communities, close to shops and transport, with a mix of independent retirees, aged care units and younger apartment dwellers with retail outlets on the ground floor. 
 
There are about 1700 retirement villages in Australia. Statistics are sketchy but Grant Thornton estimates the average length of stay is up to 12 years. 
 
While close to 5 per cent of Australians over 65 live in retirement villages, this is well short of the 12 per cent take-up rate in Canada and the United States. 
 
If the Australian take-up rate begins to approach the international average, the number of residents could increase from around 100,000 at present to more than 700,000 by 2050. 
 
Ansell believes more people will choose to live in retirement villages when the villages begin to respond better to the more discerning tastes of baby boomers and create more flexible funding structures. Because people are living longer and staying healthier, McMillan says they are moving to retirement villages later than they did in the past. Some may move again, into a hostel or nursing home. 
 
According to Health Department statistics, a person aged 70 today has a 36 per cent chance of needing high level residential care in his or her lifetime. There are currently around 187,000 residents in 2938 aged care homes. The average age of residents is 83, with an average length of stay of just under three years. 
 
Grant Thornton also envisages changes in residential aged care as demand for services doubles over the next 10 years. In a recent review of the sector, it predicted that residential care will be provided later in life as retired baby boomers demand a range of services to allow them to remain at home as long as possible. 
 
This means aged care services will focus more on high care nursing homes, a trend already in evidence. 
 
FUNDING RETIREMENT VILLAGES 
There are three ways of paying for accommodation in a retirement village – the loan and licence structure, strata title which is becoming increasingly less popular and the newer rental model. 
 
Say you want to move into a $300,000 unit in a well-located retirement village. Under the loan and licence structure, you lend $300,000 to the village developer in return for a licence to occupy the unit but there is no actual transfer of ownership. You then pay a low weekly service fee until you die or leave the unit, when the balance of the loan, after deducting a deferred management fee (DMF), is repaid to you or your estate. The DMF covers the operating costs of the village, maintenance and the like and is generally between 20 and 40 per cent of the then market value of the unit. This means the operator gets most, if not all, the capital appreciation on your unit. 
 
Ansell says around two thirds of retirement village residents move in on this basis. However, he believes baby boomers will want a higher level of ownership. Under the rental model you pay little or no entry contribution - a refundable bond equal to four weeks rent is typical. You then pay a high ongoing weekly or monthly rental fee for your unit, but no exit fees when you leave. McMillan says residents might pay a monthly charge of around $3000 on a rental unit. This compares with around $300 a month on a lease and licence unit, on top of the upfront licence fee and the deferred management fee. Australian Unity’s premium villages charge monthly fees closer to $800 month. 
 
“The issue is that people are living longer than their money. You have to estimate how long your money will last,” says McMillan. Some villages allow people to try before you buy, by paying rent for the first few months then converting to a normal lease and licence if they like the place. 
 
In Australia, rental villages have traditionally been at the lower end of the market. However, Ansell says higher end rental villages are beginning to be developed with similar facilities and amenities to traditional loan and license villages. 
 
THE COST OF AGED CARE 
Residential aged care is designed for people who can no longer manage in their own home. It includes low care facilities or hostels and high care facilities or nursing homes. To obtain a place you must be assessed by an Aged Care Assessment Team. 
 
People moving into a hostel are generally asked to pay a refundable accommodation bond if they have assets of more than $33,500. Hence, if your assets are $100,000 the most you will pay is $66,500. McMillan says these bonds currently range anywhere from $100,000 to $1 million, with the average around $200,000. 
 
The care provider uses the accommodation bond to deduct a maximum payment of $280.00 a month (indexed biannually) for up to a maximum of five years. 
 
If you pay the bond as a lump sum, your home is exempt from social security and veterans affairs assets tests for two years, or longer if your spouse or carer remains living there. 
 
Alternatively, you can opt to pay some, or all, of the bond in regular instalments and rent out your home to cover the cost of the payments. Your home is still exempt from the assets test and the rental income is exempt from the income test. However, your payments will include an interest component currently set at a punishing maximum of 11.15 per cent a year and gazetted quarterly. 
 
On top of the bond there is a basic daily care fee plus an income-tested daily fee which are set according to whether you are a full, part or non-pensioner. The basic fee ranges from a maximum of $31.52 for pensioners to $39.28 for non-pensioners while the income-tested fee can add an extra $24.26 a day for a part pensioner to $55.28 a day for non-pensioners. 
 
Strangely, if you pay an accommodation bond of more than $135,000 you will be charged the higher non-pension daily fee even if you are a pensioner. 
 
If you decide to sell your home and invest the proceeds to cover aged care costs, the deemed income will be immediately assessable for pension and income-tested fee purposes. 
 
Obviously, those who can afford it are better off paying as much as possible as a lump sum because it is difficult to generate enough investment income to produce a profit after the 11 per cent interest on the accommodation bond payments are taken into account. 
 
Anyone who has visited ageing relatives in a nursing home will understand the importance of finding the best accommodation you can afford because quality varies and can make an enormous difference to a dependent and frail elderly person’s quality of life. Proximity to family and friends is also an important consideration. 
 
You are generally not asked to pay a lump sum bond in a nursing home unless it is an extra-service facility, but ongoing fees are similar to those in hostels. Unless you have paid a bond, there is an additional daily accommodation charge of up to $17.55 a day for people with more than $33,500 in assets. 
 
In time, it is likely that bonds will be charged on all levels of aged care due to the high cost of delivering quality services, demands for better services from baby boomers and the declining profitability of the sector. 
 
PAYMENT STRATEGIES 
One of the great difficulties for elderly people leaving the family home for some form of assisted living is that they are forced to make complex financial decisions at a time when the little grey cells may not be as agile as they once were. 
 
As people age they become increasingly dependent on the advice and support of friends, family and professional advisers – and vulnerable to exploitation. 
 
This fact was underlined by a recent survey of retirees conducted by SEQUAL ,the industry group for reverse mortgage lenders, which found that 45 per cent of respondents were unaware of the entry costs and fees for aged care. 
 
Not only is the fee structure of different types of aged care mind-boggling in its complexity, but people also need to take into account the interlocking requirements of the age pension assets and income test. Count Financial technical services consultant Tim Sanderson says a lot of people come to the firm wanting to know whether they should sell the family home to pay an accommodation bond (see case study). 
 
“People need to be aware that there are strategies available – by keeping the home and renting it out and not paying all the bond upfront - that can exclude the home from the assets and income test,” he says. “The other main issue is that, once you are in an aged care facility, receiving some age pension qualifies you for a reduced (daily care) fee,” he says. 
 
Sanderson suggests that people considering moving into an aged care facility should have as little of their money as possible invested in financial investments such as cash, shares and managed funds and as much as possible in a super pension or annuity. 
 
This is because the deemed rate of interest on money held in cash, shares and managed funds is likely to be more than the income from a long-term annuity or super income stream. 
 
By reducing your investment income you reduce the amount included in the Centrelink income test. Hence, you could end up with an increase in the age pension as well as a reduction in the income-tested daily fee charged by your hostel or nursing home. 
 
McMillan says Australian Unity has been getting more enquiries about reverse mortgages to leverage into aged care, which he sees as a looming trend. 
 
“We have residents in their 90s who retired at 58 thinking they would only live another 20 years. Their money runs out and they’re living on the pension. There will have to be more thought from the industry and government into how retirees can release equity (from the family home) in a way that’s not as punitive as reverse mortgages are seen to be,” he says. 
 
Typically, reverse mortgages must be repaid when the borrower sells their home, dies or moves out for any reason. However, SEQUAL executive director, Keiran Dell says that in the last 18 months or so a handful of lenders have released products that allow borrowers to move into aged care and use the reverse mortgage on their home to help fund it. 
 
Case study: the family home 
The decision about what to do with the family home when an elderly person moves into aged care is one of the most important decisions they will make in retirement. The outcome can have a major impact on the person’s entitlement to the age pension and their ongoing financial security 
 
Take the example of Margaret, who at age 85 and a widow is about to move into a hostel. She has been asked to pay an accommodation bond of $140,000 which can be paid upfront in full, periodically as interest only payments or a combination of the two. 
 
Margaret has a part age pension of $10,700 a year, assessable assets of $250,000 in a bank account with Centrelink assessable income of $12,962, and a home worth $400,000. She is not sure what she should do with her home. Here are two options with very different financial outcomes: Option 1: 
 
Margaret keeps her home and pays the accommodation bond upfront. The family home won’t be regarded as an assessable asset by Centrelink for two years, after which time it becomes an assessable asset and Margaret is deemed to be a non-homeowner. This is her situation after two years: 
> assessable assets: $510,000 
> assessable income: $5262 per annum 
> age Pension: $539 per annum 
> hostel fees: $14,822 
 
Not only has Margaret’s age pension reduced to almost nothing, she pays close to $15,000 a year in fees for her daily care. The outcome would be similar if she had sold her house to pay the accommodation bond and invested the remaining proceeds. Option 2: 
 
Margaret keeps her home, rents it out and pays part of her accommodation bond in periodic instalments. This allows her to take advantage of a powerful exemption, excluding her home from the Centrelink income and assets tests on an ongoing basis. 
 
Margaret rents out her home for $12,000 a year. She then elects to pay $139,000 of her accommodation bond upfront and the balance of $1000 in periodic payments, at an interest rate of 10.75 per cent. 
> assessable assets: $111,000 
> assessable income: $5317 per annum 
> age pension: $13,226 per annum 
> hostel fees: $14,836 per annum. 
> interest on remaining bond: $108 per annum 
 
By renting out her home, Margaret’s daily fees are around the same as in the previous option but she now receives an additional $12,633 in age pension. Plus, she now has an additional $12,000 in rental income to help meet her living costs. Importantly, this income is not counted when working out her hostel fees. What’s more, she now receives more pension than she did prior to moving into aged care. Source: Count Financial