Agree an additional amount of Accommodation Bond?

Agree an additional amount of Accommodation Bond?

by Christine Hopper

Aged care managers strongly advise entrants to agree an additional amount of Accommodation Bond

Admission managers at aged care facilities frequently advise potential residents that “if you pay a higher Accommodation Bond then you will get more Age Pension and eliminate the Income Tested Fee”. This ‘advice’ might be factually correct for some but not all, residents but it is unlikely to be in the best interests of any resident.

Who benefits from an additional amount of Accommodation Bond?

The aged care facility would clearly benefit financially from having an additional amount of Accommodation Bond. Alas, this  ‘interest free loan’ to the facility need not provide any additional benefit to the resident.

But what benefit does the resident receive for agreeing an additional amount of Accommodation Bond?

In practice, the new resident gets no additional benefit from the aged care home but she cops some additional costs in respect of the additional amount of Accommodation Bond agreed.

Firstly, the new resident has an obligation to pay interest on the additional amount of Accommodation Bond until the Accommodation Bond including the additional amount, is paid in full.

Secondly, the resident loses the opportunity to invest the additional amount of Accommodation Bond in, say, a pensioner deeming bank account.

Please note that if the resident invests the equivalent of the additional amount of Accommodation Bond then Centrelink would deem the additional amount to be earning interest at the ‘deemed’ rate.
If the resident were eligible for a part Age Pension only under the Income Test, then the amount of Age Pension could be reduced by half of the amount of interest deemed to be earned on the additional amount and an Income Tested Fee could be levied equivalent to 20.8% of the interest deemed to be earned on the additional amount.
Thus for a resident whose Age Pension is reduced on account of the Income Test, retaining the additional amount of Accommodation Bond would generate an additional net income of 29.1% of the interest deemed to be earned on the additional amount.

In summary, the Income Test impacted part Age Pensioner resident would ‘forfeit to the government’ a substantial portion of the deemed interest on the additional amount retained. But the resident would retain part of the deemed interest plus any additional investment return in excess of the deemed rate.

The impact of paying an additional amount of Accommodation Bond is different if the Age Pension amount is impacted by the Assets Test rather than the Income Test, or the pensioner’s financial resources are below the relevant Allowances.

In summary, for an Income Test impacted part Age Pensioner agreeing to an additional amount of Accommodation Bond is equivalent to forgoing income of 29.1% of the deemed interest on the additional amount and paying interest on the additional amount of Accommodation Bond until the Accommodation Bond is paid in full.

An example of an Age Pensioner who is asked for an additional amount of Accommodation Bond

Consider Mary, a widow who was receiving the full Age Pension whilst living in her own home.
Mary had about $1,000 in her bank account and a term deposit of $10,000 together with personal and household stuff valued at $3,000. Mary’s home was valued at $500,000. Thus her Aged Care Asset Assessment showed total Assets of $514,000.

The local aged care facility quoted an Accommodation Bond of $300,000 for Mary’s preferred room. Then the admissions manager ‘advised’ Mary “to agree an Accommodation Bond of $400,000 so that Mary could continue to be eligible for the full Age Pension and pay no Income Tested Fee”.

If Mary had sold her home and had the $500,000 in cash as at 1 October 2013, the date she became a permanent aged care resident, then her financial position as at October 2013 could be:
$300,000 or $400,000 Agreed as the Accommodation Bond
$300,000  or  $400,000 Accommodation Bond  Amount paid
$211,000   or  $111,000   Remaining money
$3,000   or     $3,000        Personal stuff
$514,000  or  $514,000   Total Assets

Centrelink Assessment for Mary as at October 2013
$214,000 or  $114,000   Assessable Assets
$7,300 pa or  $3,740 pa  Deemed Income at 2.5% pa on $46,600 plus 4.0% pa on excess*
$4,056 pa      $4,056 pa  Income Test Allowance
 $1,622 pa  or   Nil        Income Test Allowance Pension reduction
 $1,182 pa  or   Nil        Income Tested Fee
$19,882 pa  or $21,504 pa  Age Pension
$27,182 pa  or $25,244 pa  Total Income
$26,000 pa or  $25,244 pa  Total Income Less Income Tested Fee

By agreeing, and then paying, an additional  $100,000 of Accommodation Bond, Mary would give up $756 pa of net income.  The net income that Mary gave away would consist of the loss of potential investment income on her $100,000 offset by the reduction in her Age Pension and the payment of a small Income Tested Fee.
The net income forgone by Mary is $756 pa or 0.76% pa return on the additional $100,000 of Accommodation Bond.

In summary for the special case of Mary a part Age Pensioner impacted by the Income Test, the ’advice’ is not factually incorrect but it is incomplete. Mary would receive a higher Age Pension and pay no Income Tested Fee if she paid $100,000 as an additional Accommodation Bond but overall she would be worse off.
The aged care facility definitely would be better off if Mary gave it an additional $100,000 of interest free loan as an additional Accommodation Bond amount.

Agree an additional amount of Accommodation Bond in other circumstances?

Mary has friends who are considering the same ‘advice’ about entering that aged care facility with Mary.

Agree an additional amount of Accommodation Bond when the resident has other income in addition to the Age Pension?
Mary’s friend Sue has a similar Asset position and a similar offer of an aged care place. But Sue has a small superannuation pension of $150 per fortnight in addition to her full Age Pension.
If Sue retains any additional money from her home sale then her Age Pension would be reduced below the full rate and she would be required to pay at least one dollar per day of Income tested Fee. Thus the admissions manager’s ‘advice’ would be incorrect and misleading to Sue’s family.

Agree an additional amount of Accommodation Bond long before the home is sold?
Helen’s family considered the admissions manager ‘advice’ when Helen had a fall and needed residential aged care immediately. They realised that Helen could be paying interest on her Accommodation Bond for, maybe, six months while they arranged the sale of her home. The interest on an additional $100,000 of Accommodation Bond could be about $550 per month from Helen’s dwindling bank account.
Helen’ family refused to increase the amount of Accommodation Bond for Helen. Actually, Helen died before her home was sold. Her family were relieved that they had not been tricked into paying additional Accommodation Bond interest for no benefit.

Agree an additional amount of Accommodation Bond when the resident receives a War Widow Pension and the Income Support Supplement?

Betty receives a DVA War Widow Pension and the full ISS but her assets are similar to those of Mary.  If Betty sells her home and enters residential aged care she will be required to pay some Income Tested Fee on account of her War Widow Pension entitlement.  If Betty retains the $211,000 of cash she would still receive the full ISS. Thus if Betty paid an additional $100,000 of Accommodation Bond she would forgo the interest on the $100,000 but only reduce her Income Tested Fee marginally.

The ‘advice’ from the aged care facility manager is both incorrect and against Betty’s interests overall.

Self-funded retirees with no Age Pension entitlement might agree an additional amount of Accommodation Bond
Self-funded retirees have the option of having Centrelink assess their Income Tested Fees or just paying the maximum Income Tested Fee and retaining their privacy. For a self-funded retiree, agreeing to an additional amount of Accommodation Bond is similar to giving an additional interest free loan in the hope of reducing the Income Tested Fee marginally.

So what is a reasonable Accommodation Bond Amount?

Aged care facilities are costly to build and equip. The aged care facility must incorporate industrial standards of kitchens and laundry. The corridors and bathrooms must be spacious enough to accommodate wheelie walkers everywhere. All hot water outlets must be safe for our frail and demented friends. The combined impact of the many safety and administrative features of aged care facilities results in an average building cost per resident well in excess of $200,000 in suburbia.
The cost of land is an additional expense. Rural land might be cheaper to buy but the specialist fit out could require specialist teams from the city. Thus an Accommodation Bond of $300,000 could be reasonable for a single room with sole use of a bathroom, in newish suburban building.

Asset Assessments are optional: Accommodation Bonds are Negotiable

Completion of the ‘Permanent Residential Aged Care Request for an Asset Assessment’ is only required for potential Supported Residents. If you do not have at least $114,000 of Assets and need the Commonwealth to pay a Supported Resident subsidy to help with your accommodation costs then the Commonwealth wants to be sure that you are eligible for that subsidy.

Completion of the ‘Permanent Residential Aged Care Request for an Asset Assessment’ is optional for all other aged care entrants. If you choose to obtain an Asset Assessment no aged care facility can compel you to show it. Wise people do not disclose their financial position at the start of a price negotiation. You should not be intimidated or bullied into disclosing the actual asset value for a Non-Supported Resident.

Once you have agreed your Accommodation Bond then you need only advise the aged care facility that the resident’s assets are at least $44,000 more than the agreed Bond amount.

Before agreeing an additional Accommodation Bond amount seek independent financial advice from an aged care specialist.

Choose a professional financial adviser who has no links to any aged care facilities. Be careful of taking advice from the same firm who will be investing the Accommodation Bond money on behalf of the aged care facility operators. Select a professional adviser who will put your interests first.

Financial Care Services offers independent professional financial advice to aged care residents and their families. Financial Care Services is owned and operated by Christine Hopper and has no links to any aged care operators or other service providers.

If you would like further confidential, independent and professional advice about aged care entry, Centrelink, lifestyle or financial issues please contact Christine Hopper (03) 9808 0338.

Disclaimer: The information contained in this website is of a general nature only and does not constitute “financial advice”. You should obtain your own personal financial advice before investing any money or moving in to any retirement village, lifestyle community or aged care facility. Financial Care Services is licensed to provide financial advice to individual clients based on their personal situations. © 2013 Financial Care Services Pty Ltd. All rights reserved.
To make an appointment for professional advice, call Financial Care Services
(03) 9808 0338