I have been trying to weigh up the Fair Deal scheme, as I am of an age when it is becoming of interest. In particular, it would seem worthwhile to divest oneself of assets before applying for the scheme say by giving the children some early inheritances. Is that so?
Also, the treatment of ARFs and shareholdings is difficult to grasp, in that both the asset values and the income appear to be used in the calculation of the contribution. Am I correct in that? And why would they do that? It looks like they are hitting the same thing twice.
Mr J.R., email
Fair Deal is the scheme under which the State pays part of the cost of nursing home care for patients. It is a tremendously useful programme and one that makes sense for most people to avail of.
Nursing home charges amount to about €1,000 a week. That’s €52,000 a year. And with the average nursing home stay amounting to around three years, the likely bill would be over €150,000.
And that’s just for the bed and basic nursing services and food. Any “extras” – such as a newspaper, a hair cut or even involvement in social activities provided by the home – are likely to be priced separately and charged to the patient.
You’re planning for the future rather than any current need, so you can expect the costs will rise.
Such costs are beyond the reach of most older people, especially as much of their financial worth can be tied up in assets like the home or land that don’t deliver a cash income to meet the bills.
That’s where Fair Deal comes in. It won’t pay the cost of the “extras” but it will meet the cost of the basic nursing home care. The price to the patient is 80 per cent of their cash income annually and 7.5 per cent of the value of their assets, investments and savings. The first €36,000 of such savings are exempt from this charge.
For the family home, that 7.5 per cent contribution is limited to just three years and is payable only when you die.
Those contribution levels are halved to 40 per cent and 3.75 per cent where only one member of a couple is availing of the scheme. Similarly, the savings exempt from the charge doubles to €72,000.
The State picks up the balance, which, for most people, is an extremely good deal.
You have two particular issues. The first is the question of divesting assets. No one likes paying more to the State than they have to and, as the 7.5 per cent charge is levied on all savings, investments and other assets, one way of reducing the cost is clearly to gift them on to other family members.
This might be something you had intended doing in a will but, with the prospect of nursing home care potentially looming, are now considering gifting to them during your lifetime.
There’s nothing stopping you doing that. However, you do need to be aware that if you were to apply to avail of Fair Deal within five years of handing over assets in this way, the value of those assets would be taken into account in assessing your required financial contribution.
This clawback provision is in place precisely to stop people being too cute in divesting their assets on the eve of entering care. However, as I understand it, you are currently in good health and are merely assessing options for the future so it could well be that you have no trouble meeting the five-year threshold.
It is also possible if you did unexpectedly fall ill and require nursing home care that you could delay applying for Fair Deal – meeting the full cost of care yourself – for the first year or two until the five-year threshold has been met. This is something you’d need to work out the numbers on: not many people can take on a €100,000-plus bill for the sake of ringfencing some assets.
In tax terms, such gifting would make no difference to the recipients. The capital acquisitions tax thresholds and rates are the same whether it is a gift or an inheritance – although they may face a tax bill earlier than they had expected.
For your part, crystallising a capital gain on the transfer of an asset could certainly leave you with a capital gains tax bill which would otherwise die with you should the assets be distributed after your death.
ARFs and shares
The position with ARFs (Approved Retirement Funds) and shares can be difficult to get your head around in the context of Fair Deal but it does make sense.
Approved Retirement Funds are an increasing popular way for private sector workers in defined contribution pension schemes to retain control of their retirement savings. The alternative – placing the money with an insurance company and drawing down a fixed annual income via an annuity – has become rank bad value in recent years although it does have the advantage of certainty.
The rules for ARFs states that you must draw down a minimum of 4 per cent of the fund each year up to the age of 71. Thereafter the figure is 5 per cent. If you don’t actually draw down that much, Revenue will tax you as though you have.
Under Fair Deal, this 4 or 5 per cent drawdown is clearly cash income and subject to the 80 per cent rule that it applies on income. That’s fair enough. But what about the rest of the fund that remains invested?
Well that’s the thing. This amount counts towards your assets and Fair Deal will charge you 7.5 per cent of the fund value as part of your contribution to the cost of your care. So you will be assessed on both the amount you draw down as income from the fund and also the residual balance of the fund.
The same is true of shares. These count as capital assets subject to the 7.5 per cent annual charge. And if a share delivers an income by way of a dividend, then this dividend is considered cash income and 80 per cent of it will go to the cost of care.
Of course, a question that people will ask is: how can I be charged 80 per cent of cash income when I am also paying income tax on that money at 20 per cent or more?
There are certain things that are deducted from your income when it is being assessed and before the 80 per cent charge is levied. Chief among these is any income tax you are liable to pay, along with USC and, where applicable, PRSI.
Other items that will be taken into account are health expenses – such as GP charges, drug charges and other medical expenses – and, where applicable, any maintenance payments that a person may be obliged to make or the costs of a child in full-time education.
Finally, any interest on home loans or property tax charges is allowed before income is assessed.
Clearly with 80 per cent of income already taken by Fair Deal and a portion of the rest required for additional nursing home services, meeting the 7.5 per cent capital requirement will mean most people having to sell or cash in some or all of their assets.
But the purpose of Fair Deal is not to protect people’s assets and ensuring there is something to pass on to the next generation; it is to ensure people are not deprived of access to nursing home care because of financial circumstances. And there’s always at least slightly more than three-quarters of the value of the family home ringfenced for any successors.
For those few people for whom the contribution from assets together with the 80 per cent charge on assessable income amounts to more than the full nursing home bed charge of around €1,000 a week, it clearly makes sense not to apply for Fair Deal and to manage the cost themselves.
You might never need nursing home care, or Fair Deal, but as with most things in life, it’s always a good idea to plan ahead.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email firstname.lastname@example.org. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into