August 14, 2017
Who is it for?
Residential Aged Care is generally for older people who for various reasons can no longer live at home. Living in an aged care home provides assistance with day to day tasks, personal care or 24-hour nursing care. It also provides access to social activities.
User pays system
Australia has one of the highest life expectancies in the world and life expectancy rates are continuing to climb. The ageing population is creating pressure on supply of aged care services and on government budgets. Major changes were implemented in this area from 1 July 2014. For many residents, aged care reform introduced a user pays system – the more a person has in income and assets, the more they may be asked to contribute towards the cost of their care.
Affordability of care
When someone enters residential aged care, it is usually an emotional and stressful time for everyone involved. There is a lot of information to take in when entering an aged care facility. General information about the process of finding a residential aged care facility is available through the My Aged Care website at www.myagedcare.gov.au, and to be eligible to receive Government subsidised aged care, everyone entering Residential Aged Care must be assessed by the Aged Care Assessment Team (ACAT) first.
Before signing an agreement with an aged care facility and moving in, one needs to understand the fees that will be payable. Affordability of accommodation payments and ongoing care fees is an important determining factor when selecting an aged care facility.
As with any accommodation option, a person will need to pay for their accommodation and their ongoing lifestyle expenses. They will also be asked to pay towards their cost of care if they can afford to do so. There are four types of fees that may be payable:
- Basic daily fee – This covers living costs such as meals, power and laundry. Everyone pays the basic daily care fee, which is equivalent to 85% of the maximum single Age Pension.
- Means tested care fee – This is an additional contribution towards the cost of care payable where the person’s assets and income exceed certain level. Annual and lifetime caps apply.
- Accommodation payment – This is a payment for accommodation. While the Government will subsidise accommodation costs for certain ‘low-means’ residents, everyone else will pay the accommodation price agreed with the aged care home. The accommodation payment is set by the service provider based on commercial factors. The service provider may charge the same price for all rooms or a different price for different rooms.
- Extra services – Additional fees may apply for higher standards of accommodation or additional services. Fees vary depending on the aged care home.
The accommodation payment – ways to pay
It is important to note that the accommodation payment can vary from service to service. Before paying an accommodation payment, there are a number of factors to be aware of:
- Accommodation payments are set by the service and published
Each accredited residential service needs to set the payment (or range of payments) and publish these amounts on their own website as well as on myagedcare.gov.au.
- Residents can choose a lump sum or daily payment or combination
The Resident Agreement will specify the accommodation payment as both a lump sum (called a refundable accommodation deposit – RAD) and the equivalent daily accommodation payment (DAP). This is a bit like choosing to either “buy” or “rent” the room.
As at May 2016, the average accommodation deposit published on the My Aged Care site was $377,000/$64.86 per day. Of the rates published, 86% were less than $550,000ᶜ.
The conversion of the RAD into a DAP is based on an interest rate (called the maximum permissible interest rate – MPIR) set by the government. This interest rate may change each quarter. The rate from 1 April 2017 to 30 June 2017 was 5.78% per annum.
The resident has 28 days after moving into care to decide which option to pay. This gives residents time to seek advice on how to structure investments to meet cashflow and protect their estate.
- RAD is fully refundable and guaranteed
The RAD is fully refundable when the resident leaves care (or passes away), unless the resident has allowed the service provider to deduct other fees from the RAD (i.e. part has been spent). Repayment is guaranteed by the Federal Government, provided the service provider is approved under the Aged Care Act.
Should a RAD or a DAP be paid?
There are a number of considerations when deciding how a resident should pay their accommodation payment.
Advantages of paying a RAD include:
- saves paying interest on the outstanding accommodation payment amount
- may increase the rate of Age Pension payable as a RAD is an exempt asset that is not subject to deeming
- may reduce the amount of means tested fee payable as a RAD is not deemed (however it is included as an assessable asset).
Advantages of paying a DAP include:
- resident may not want to sell assets to pay a RAD (for example, they may want to leave a particular asset to the family through their estate)
- may incur capital gains tax if sell assets to pay a RAD
- if the expected amount of time in aged care is relatively short, it may be simpler to pay the DAP rather than sell assets and pay a RAD
- may not have funds available to pay a RAD.
Walter is single and a non-homeowner. Walter receives the Age Pension. Walter has $500,000 in financial investments subject to deeming. He is looking to enter an aged care facility with an accommodation payment of $300,000 in January 2017. The table below compares the aged care fees and Age Pension payable under the following scenarios:
- Paying 100% of the accommodation payment as a DAP.
- Paying 100% of the accommodation payment as a RAD.
|Aged Care Fees
|Basic Daily Care Fee
|Means Tested Care Fee
|Total Aged Care Fees
Under the option where Walter pays 100% of the accommodation payment as a DAP, he receives $4,875 pa less Age Pension and has to pay $2,445 additional means tested care fee. He also needs to pay DAP of $17,280. That totals $24,599 worse off than in the 100% RAD scenario. However, the lost earnings on the $300,000 needs to be taken into account. The $300,000 would have to earn at least net 8.2% to break even.
The aged care system in Australia is a complex system for people to understand.
The area of aged care advice is specialised and requires not only a solid understanding of the aged care system and fees, but also of other services available and the interaction with Centrelink.
For residents entering care services, access to professional advice is increasingly important to not only understand how to navigate through the system to make the right choices but also to consider options on how to pay for care.
The importance of receiving financial advice has never been greater, as correctly structuring accommodation payments and investment strategies can produce significant benefits.
Our adviser, Alex Lukashenok, is an Accredited Aged Care ProfessionalTM
The above information is a summary of a very complicated and detailed system. Therefore, please contact our office to book an appointment with Alex for further information or advice.
ᶜ 2016 Report on the Funding and Financing of the Aged Care Industry. Available at: https://agedcare.health.gov.au/2016-report-on-the-funding-and-financing-of-the-aged-care-industry.