Older clients and their living options

By Claudine Siou, Senior Technical Services Manager

Ageing influences our housing choices. Older Australians often don’t seek help to inform their housing decisions, although housing decisions can have a significant effect on their physical, mental, emotional health and wellbeing. Financial advisers who engage with older clients to discuss the housing and care options in retirement, may support their clients to make better housing decisions.

Opportunity for advice on housing and care options in retirement

Research by the Productivity Commission indicates that older Australians are reluctant to engage a financial or other specialist adviser or even speak to family members to inform their housing decisions and aged care costs.1

Some financial advisers give advice to elderly clients or their enduring power of attorney, in relation to entry into residential aged care. However older persons are trending away from residential aged care and increasingly view it as an end-of-life option.1 As a result the length of stay in aged care is decreasing to just under 3 years.2

Financial advisers are well-placed to understand a client’s health, lifestyle, family and financial circumstances – factors that affect their housing decisions. An opportunity exists for financial advisers to discuss the spectrum of housing and care options with clients in the early stages of retirement, to add value to their advice proposition.

Spectrum of choices

Housing and care needs of older people change as they age. The stages, as defined by the Productivity Commission, can be categorised as ‘active’, ‘passive’ and ‘frail’.

Aged care stages

Source: Productivity Commission, Housing Decisions of Older Australians.

Aged care options

The Commonwealth Government subsidised aged care services include:

  • Commonwealth Home Support Programme (CHSP): helping older Australians access entry-level support to live independently and safely at home
  • Home Care Packages: enable eligible older people to receive additional home care services they require, to remain in the home longer
  • Residential care: provides accommodation and full-time care for those who have greater care needs and enter an aged care facility, on either a temporary (respite) or permanent basis

Aged care in Australia 2018-19

Home support (CHSP)Home Care PackagesResidential care
Number of consumers 840,984 133,439 242,612
Commonwealth funding $2.6b $2.5b $13.0b
Consumer contribution $252m $107m $4.8b
Average subsidy per consumer* $3,092 $18,735 $53,583
Average age 80.0 82.4 84.8

*Commonwealth funding divided by number of consumers. Note the government subsidy for Home Care Packages varies according to the package level (1-4).

Source: based on Aged Care Financing Authority, Eighth report on Funding and Financing of the Aged Care Industry, July 2020.

Home care services provided through CHSP and Home Care Packages require much less public funding compared to residential care, despite a much higher number of consumers receiving home care services. The lower public cost of funding home care and the preference of older Australians to age in their own home, is driving Government policy to increase the accessibility of home care. Access to CHSP and Home Care Packages are not restricted to only Australian citizens or permanent residents.

Commonwealth Home Support Programme (CHSP)

CHSP provides entry-level support for people aged 65 or over (50 years and over for Aboriginal and Torres Strait Islander people) to help them live independently in their home. Services provided under CHSP include occasional domestic assistance and personal care and home maintenance and modification.

Home care packages

Home care packages are provided by the Australian Government, to support older people with more complex needs to help them live independently in their homes. Care and support is provided through home care services which can include meal preparation, personal care, mobility support and clinical care such as nursing.

Housing options

The Productivity Commission’s research paper on the Housing Decisions of Older Australians compared the key features of housing options in the table below.

Key features of housing options for older Australians

HomeownersPrivate rentalSocial housingMobile home communitiesRetirement villagesResidential aged care
Services offered Home based aged care for eligible people Home based aged care for eligible people Home based aged care and other services for eligible people Basic services from providers; can access home care Varies by village, and some offer extensive services; can also access home care Ongoing care
Access to government funded home modifications Yes, subject to eligibility and waiting times* Yes, but requires landlord agreement No – done by housing provider Yes, subject to eligibility and waiting times Depending on services provided by retirement village Not applicable
Legal ownership status/tenure structure Own land and dwelling Lease dwelling Lease dwelling Mostly own the dwelling and lease the land Long-term license to occupy the dwelling Not applicable
Security of tenure High Low – can be evicted without grounds High – often lifetime tenure Low – can be evicted without grounds in some jurisdictions High High
Regulation Supply of care controlled by Commonwealth Government Varies by jurisdiction Funded (and often provided) by States and Territories Varies significantly by jurisdiction Varies by jurisdiction Supply controlled by Commonwealth Government
Fee structure Imputed rent ie net market rent if property was rented commercially Market rent Rent – fixed proportion of income Purchase price of home + ongoing fees (some also pay at departure) Ongoing fees + refundable lump sum at entry + departure lump sum Subsidised ongoing fees. Can choose to pay refundable lump sum for accommodation
Govt support Home exempt from Age Pension asset test. Only part of value included in residential aged care asset test Age pensioner eligible for Rent Assistance Rents are subsidised Age pensioners eligible for Rent Assistance. Value of dwelling exempt from Age Pension means test Mostly ineligible for Rent Assistance. Entry contribution exempt from Age Pension asset test Means testing determines fees payable. The value of the principal residence included up to a capped amount

* In some dwellings, the body corporate must also agree to modifications.

Source: based on Productivity Commission, Housing decisions of Older Australians.

Homeowners, retirement villages and mobile home communities are considered below.

Considerations for homeowners

The majority of older Australians prefer to live independently in their own home. The Productivity Commission survey undertaken in 2015 found that 83% of people aged 60 years or more, preferred to live in their own home.3

Home ownership provides the greatest security of tenure and the greatest freedom to customise the accommodation to their needs3. The home may be customised by modifying the existing home, constructing a new age-friendly home or granny flat.

Drawing on home equity

Older homeowners hold a large share of their wealth in their homes and typically access home equity as a last resort.3 The Productivity Commission survey found that the majority of older Australians acknowledge that their current home will not play a role in funding their retirement or have never thought of their home in that way.3

Older homeowners tend to be asset rich and income poor. Precautionary saving in the form of the home, may mean that those who continue to live in their home are over-saving, when releasing some equity could increase retirement income. Options for drawing home equity are:

  • Downsizing
  • Equity release products
  • Pension Loan Scheme

Downsizing

Downsizing tends to occur relatively early in retirement. Over 85% of older Australians who downsize do so before they turn 70.

Government policy provides incentives for Australians aged 65 or over to downsize. Downsizer contributions are intended to free up housing for young people and encourage older Australians to access the equity in their home for retirement purposes. In the first year, after the introduction of the measure on 1 July 2018, 4,246 older Australians made a total of $1 billion in downsizer contributions.

Equity release products

The market for equity release products is very small. Reverse mortgages make up the vast majority of the market. Consumer demand for reverse mortgages may be adversely impacted by older Australians not viewing their home as a source of funding in retirement, the complexity of products and the Centrelink assessment of home equity release products. For Centrelink purposes, the first $40,000 of an unspent home equity conversion loan is an exempt asset for 90 days. If, after 90 days a person has not spent the released proceeds, the amount is an assessable asset. While the amount is held in a financial investment, such as a bank account, it is subject to deeming.

Pension Loans Scheme

The Pension Loans Scheme (PLS) enables older Australians to generate additional retirement income by accessing the equity in their real estate. To be eligible for the PLS:

  • the person must be of Age Pension age (or the partner of someone who is);
  • qualify for Age Pension, Disability Support Pension or Carer Payment but they do not have to receive an income support payment. For example, self-funded retirees must qualify for Age Pension but do not need to satisfy the pension income and assets test.
  • have adequate insurance over the property.

Since 1 July 2019, age pensioners who access the PLS can top-up their pension to 150% of the maximum fortnightly rate of Age Pension. Self-funded retirees can get 150% of the maximum fortnightly rate of Age Pension using the PLS. Interest at the rate of 4.5% (1 January 2020 to present) accrues fortnightly until the debt is repaid, the real estate sold or the PLS recipient dies. The debt is secured by a charge over the property, typically by the Commonwealth Government lodging a caveat.

Retirement villages

Retirement villages are increasing in popularity. Retirement villages are purpose built, low maintenance homes for older people, with support in place if needed. Residents live in independent units or serviced apartments in which they are provided with meals, cleaning and other services. Retirement villages are regulated by state or territory legislation.

Retirement villages appeal to people who wish to live independently, although want to enjoy the social environment and support of a village community. Retirement villages are lifestyle focused and offer shared facilities, social activities and less home maintenance. If a retirement village is co-located with an aged care facility, they operate separately. Clients should be aware that there is no guarantee that they will be offered a place in an aged care facility co-located with a retirement village.

Costs

Retirement villages usually cost less than the average price of a home in the same area. Homeowners can free up money for retirement by moving into a retirement village, but the additional funds may impact their Age Pension. To preserve their pension rate, it may be possible to negotiate a higher entry contribution and lower deferred management fee when planning the entry to and exit from a retirement village.

There are a number of costs associated with living in a retirement village. Costs are agreed to before occupying a spot in a retirement village and are set out in the contract. Costs include:

  • entry contribution: this can vary depending on factors including location, facilities, age and condition of the unit, and other fees to be paid
  • service charge: for general maintenance of facilities and common areas, staff, council rates, water for common areas, emergency call system, insurances (workers compensation and public liability, contents insurance for common areas, village building insurance)
  • deferred payment fee (exit fee or deferred management fee). Commonly a percentage of the entry payment or resale/re-let price which an incoming resident pays
  • retirement village operator’s entitlement to a share of any capital gain. Commonly 50% of any capital gain is retained by the operator and 50% by the resident, although this can vary. The entry contribution and deferred management fee can also alter the share of capital gain the resident is entitled to.
Example

A resident sells their unit in a retirement village. Key metrics are:

  • Entry contribution: $400,000
  • Length of stay: 10 years
  • Deferred payment fee: 3% per year of sale price (capped at 30% after 10 years)
  • Sale price: $550,000
  • Outgoing resident entitled to 50% of capital gain
  • shared facilities
  • social activities and services
  • physical security and safety of a gated community with on-site staff
  • no maintenance (eg lawn mowing, maintenance of shared facilities)
The return to the resident is calculated as:
Deferred payment fee calculated on sale price: 30% x $550,000 = $165,000
Capital gain: $150,000   
Resident entitled to 50% of capital gain: $75,000   
Return to resident:$400,000 + $75,000 CG – $165,000=$310,000

Most age pensioners living in retirement villages aren’t eligible for Rent Assistance, because their entry contribution exceeds the extra allowable amount ie. the difference between the pension asset test thresholds for homeowners and non-homeowners (currently $214,500). Centrelink’s different approach to assessing retirement villages and lifestyle parks produces inequitable outcomes between residents of these similar housing options.

Rights and obligations of people residing in retirement villages are governed by the contract signed when entering the village. The type of tenure (eg. lease, strata title, licence, rental agreement, company title) may vary and it is important for clients to seek legal advice from a solicitor experienced with retirement village contracts before signing one.

Care options

There are no restrictions on the delivery of home care (CHSP and Home Care Packages) in retirement villages. However, as the operator of the retirement village is often responsible for maintaining parts of the dwellings (as well as the common areas), home maintenance and modification services, which usually fall under CHSP or Home Care Packages, are not provided to dwellings within retirement villages. Maintenance of fixtures and fittings in a village home (eg leaky pipe or bathroom tap) are usually covered by service charges.

Mobile home communities and lifestyle parks

Lifestyle parks can be purpose built or mixed purpose and are regulated under state or territory residential parks or residential tenancy legislation. Security of tenure is relatively low compared to retirement villages. Depending on the state or territory, residents can be evicted without grounds if given sufficient notice. However, most states and territories have legislated to provide greater security of tenure to long term owners and residents can only be evicted on specified grounds.

These housing options consists of:

  • lifestyle parks
  • residential parks
  • manufactured home estates
  • caravan parks

Residents usually own their home and lease the land on which it sits. Lifestyle parks offer residents a range of benefits, such as:

  • community environment
  • shared facilities
  • social activities and services
  • physical security and safety of a gated community with on-site staff
  • no maintenance (eg lawn mowing, maintenance of shared facilities)

Costs

Lifestyle parks can be a more affordable housing option for retirees. Compared to retirement villages, there are no exit fees or stamp duty payable. Unlike most age pensioners living in retirement villages who aren’t entitled to Rent Assistance (because their entry contribution exceeds the extra allowable amount), age pensioners living in lifestyle parks who do not own the land and pay site fees, may be entitled to Rent Assistance.

Granny flat arrangements

Granny flat arrangements are typically, an agreement between an older person and a family member, by which the older person transfers the title of their home or gives assets, in exchange for a right to accommodation for life in the family member’s home.

Granny flat arrangements as a housing option may satisfy an older person’s:

  • preference for ageing at home
  • desire to preserve their family home or assets for succeeding generations
  • social needs for ongoing engagement and participation in family life
  • preference to be cared for by family
  • desire to preserve social security income support

On 5 October 2020, the Australian Government announced a new CGT exemption for formal, written granny flat arrangements, from 1 July 2021. Under existing tax law, a written, formal granny flat arrangement results in a CGT liability for the family member who has created a legally enforceable right in the older person. The potentially significant CGT liability acts as an impediment to older people establishing written, formal granny flat arrangements. Instead older people may choose informal, unwritten granny flat arrangements which do not serve to protect their interests if, for example,  family relationships breakdown, the family member needs to move or the older person needs to move into aged care. If things go wrong, the older person could be left homeless having given up the proceeds of their home.

Conclusion

A significant majority of older Australians prefer to live in their own home as they age. Government subsidised home care services support older Australians to live independently for as long as possible. Retirement villages and lifestyle parks appeal to retirees for various lifestyle reasons. Engaging with clients about their housing and care options in the early stages of retirement supports them to make more informed housing decisions. Advisers who provide a housing assessment to clients, offer a more wholistic approach to financial planning.

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1. Source: Productivity Commission, Housing decisions of Older Australians.
2. Source: Aged Care Financing Authority, Eighth report on the Funding and Financing of the Aged Care Industry, July 2020.
3. Source: Productivity Commission, Housing Decisions of Older Australians.

More information

If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.

Disclaimer
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.