Higher aged care costs are trade-off for government reverse mortgage
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Higher aged care costs are trade-off for government reverse mortgage

Financial decisions around aged care are complex.

Financial decisions around aged care are complex.

Photo: Karl Hilzinger

As part of the federal budget last month, the government announced a plan to extend the Pension Loans Scheme – to which most people said, “what’s that?”

It is effectively a government reverse mortgage that enables people who get a part pension or no pension (because they're knocked out by either the income or asset test) to top up their income to the full pension payment, using a loan. The government takes a charge over your property and pays you a fortnightly payment. Naturally there are limits to the amount that you can borrow based on your age and the value of your property. Payments can only be made fortnightly: you can start and stop them, but you cannot access a lump sum. Interest is charged on the outstanding balance each fortnight at 5.25 per cent a year.

The proposed expansion of the Pension Loans Scheme would see possible payments increased to up to 150 per cent of the age pension and eligibility extended to anyone of age pension age. This would mean anyone receiving a part or no pension would be able to receive a higher payment than they can now, and that people on the full pension and all self-funded retirees would gain access to the scheme.

The Pension Loans Scheme could be a simple way to help meet the cost of home care, or even residential aged care. The interest rate of the scheme is relatively low compared with reverse mortgages, which are generally about 1 per cent a year higher, but be aware that, unlike taking a regular payment from a reverse mortgage, payments through the Pension Loans Scheme are included in your income for aged care means testing.

The amount of income you can earn before you start contributing towards the cost of your aged care is the same for home care and residential aged care. At the moment the thresholds are $26,660 a year for singles and $20,704 a year for members of a couple — a higher threshold of $26,192 a year applies to couples separated by illness. Once income exceeds the threshold, 50¢ in the dollar is levied as a fee. So people who use the Pension Loans Scheme to help meet their cost of care may actually increase their costs.

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Let’s look at an example.

Jack and Shirley own their home. They also have $200,000 of investments and $30,000 of personal assets. They currently receive the full pension. Jack has a home care package and pays the basic daily fee of $10 a day. Under the expanded Pension Loans Scheme Jack and Shirley would be able to receive an additional $17,787 a year income, however, by doing so the cost of Jack’s home care package would increase to about $21 a day, meaning that about $3800 a year of the additional income would be lost in fees.

If Jack moved into aged care, and Shirley stayed at home, Jack would be a low means resident and his daily accommodation contribution (DAC) would be calculated based on both his assets and his income. If Jack and Shirley were receiving $17,787 a year from the Pension Loans Scheme, Jack’s DAC would be $42 a day and his equivalent lump sum refundable accommodation contribution (RAC) would be $268,468. If they weren’t receiving the Pension Loans Scheme payment, Jack’s DAC would be $32 a day and his equivalent RAC would be about $66,000 less at $202,237.

This doesn’t mean you shouldn’t use the Pension Loans Scheme to assist in meeting your cost of aged care; you just need to know that comparing it with a reverse mortgage on the basis on the interest rate alone doesn’t consider all of the costs.

Rachel Lane is the principal of Aged Care Gurus and co-author of books such as Aged Care, Who Cares? asktheguru@agedcaregurus.com.au.