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Explainer: What to consider when planning for Aged Care
- 2 September 2024
- by Adrian D’Mello | Financial Advisor | Financial Planning
- 10-minute read
Having advised numerous people and families on Aged Care over the years, we have found that many are unsure about the various costs and factors to take into account. To help you navigate the process and gain clarity, we have set out below some important steps and considerations.
1. The medical assessment
At the outset, a person considering entering Aged Care is required to undertake a medical assessment to determine if such a facility is appropriate for them and to assess the level of care required.
It is common practice for doctors or Aged Care facilities to send the patient to the My Aged Care website to organise this medical assessment. But in our experience, it may be a lot easier and quicker to get the hospital or respite centre to organise an assessment should you already be receiving treatment or interim care (respite).
2. Refundable accommodation deposit (RAD)
When entering Aged Care, a refundable accommodation deposit (RAD) is generally required to pay for your accommodation. A RAD is akin to purchasing a room. This amount is returned when you leave the facility, but any income earned on the money (e.g. interest) is kept by the facility. You can rest easy knowing that the RAD is guaranteed by the government.
The Australian Government has set the maximum allowable RAD at $550,000. The RAD advertised can be less than this, and it is sometimes possible that the RAD is a lot higher, but in these cases the facility is required to get approval from the Minister for Health and Aged Care.
Understandably, not many people have access to such a large sum of cash and get overwhelmed at this early stage of the process. Their first thought is often that they will need to sell the family home to cover the RAD. But this is certainly not always the case!
If you are considered a “low means individual” the RAD is not payable — meaning you may not have to sell your home. More on this below.
Additionally, exemptions can also be sought on the basis that you hold an illiquid asset such as an investment property. We’ll talk more about this in the next section.
Finally, if you do not have sufficient funds or would rather not sell investments to pay the full RAD, you may choose to make a partial payment. The facility will then charge you interest on the unpaid amount. This interest cost can be funded out of pocket or debited from the lumpsum initially paid.
What if you can afford the RAD but have illiquid assets?
In the event you are assessed as being able to afford a RAD, but have illiquid assets like an investment property, you may be exempt from paying all or some of the RAD at the outset but are then required to pay interest on the unpaid amount.
The interest rate is set at the start and does not change. The current interest rate is available on the Aged Care website and is referred to as the Maximum Permissible Interest Rate (MPIR). As of 1 July 2024, it is set at 8.36%.
A general rule of thumb is that if an asset is unable to generate a return (income and/or growth) after tax of at least the MPIR (currently 8.36%), then you should consider selling the asset to pay the RAD. Any Capital Gains Tax should also be included in the calculation.
Importantly, if a RAD is partially paid, the interest cost can either be paid out of pocket or you can request it to be deducted from the RAD. Such a strategy could be helpful in terms of managing cash flow.
Do you have to pay the RAD if you are a low means individual?
The overall cost of living in an Aged Care home is significantly subsidised by the government.
This means people receiving the Age Pension with little means can access residential Aged Care. Should you be assessed as a low means individual you will never need to pay a RAD.
This is why we recommend you be means tested so that you are aware of the fees and costs applicable for your situation. In our experience, some clients get stressed about the various advertised prices and what they hear from other people without understanding that their situation is unique. While there are exceptions, these are some examples of a person assessed as low means and therefore exempt from having to pay the RAD:
- Homeowners where only one member of a couple would be entering care who have combined assets (excluding the family home) of $400,000
- A single non-homeowner with assets of less than $200,000.
Can a low means assessment change later on?
A question we hear often is, “What if my circumstances change, will I then have to pay a RAD”. While a person’s circumstances may change for several reasons (e.g. receiving an inheritance or the member of a couple who initially remained living in the family home passes away and the family home is now assessed as an asset), luckily, once you are assessed as a low means individual, you maintain that classification for life and a RAD is not payable.
Although a RAD is not payable if you are assessed as low means, where your circumstances change you may be expected to contribute to the accommodation cost. This cost will be in the form of a Daily Accommodation Contribution (DAC) up to a maximum of $68.14 per day. This amount is the equivalent of the accommodation supplement the facility is entitled to from the government. An older facility could be entitled to a lower amount, and this will be reflected in the individual’s DAC bill.
You have the option of paying a lump sum instead of a DAC and this is referred as a Refundable Accommodation Contribution (RAC) and is similar in concept to a RAD. How much the RAC is considers the prevailing Maximum Permissible Interest Rate (MPIR) and the DAC. At current interest rates, the lump sum is calculated to be $296,686. (68.14*364/8.36%).
As you can see, being assessed as low means at the outset can give you options and provide you benefits even if your circumstances improve.
3. Basic daily care fee
This fee is probably the easiest to understand. Bills received for things like food, electricity, gas, and cleaning are now paid by the care provider and the government has set a flat fee for all residents with no exceptions. It is payable whether you have paid the RAD or not. Currently the fee is $61.96 per day. It is the equivalent of 85% of the single Age Pension rate.
4. Means tested fee
That’s not all. On top of the basic daily care fee, you may also have to pay a means tested fee.
It is calculated using information held by Centrelink. If you do not receive any Centrelink benefits or payments, then you are required to complete forms with information regarding your financial assets and income so that you can receive an assessment.
If you are currently in receipt of a Centrelink means tested pension payment and your details are up to date, all you need to do is call the Services Australia Aged Care line on 1800 227 475 and request an assessment. In other words, no additional forms are required.
There is an annual cap on the means tested fee as well as a lifetime cap and this information should help with planning your cash flow needs.
How can a Financial Advisor help?
Firstly, by understanding your specific situation, a Financial Advisor will only discuss costs and concepts that are relevant to you. This helps to keep any confusion to a minimum.
Secondly, Aged Care costs are certain to affect cash flow. A Financial Advisor can advise on strategies that can help you manage your cash flow needs as well as lay out your various options for funding care.
Another mammoth task is managing Centrelink and their paperwork requirements. You can assign a Financial Advisor as your representative to take over this part of the process, which can save you the time and remove stress.
The Aged Care Bill 2024 was introduced to Parliament on the 12th of September 2024. Existing residents will not be affected and changes will only be in effect from the 1st of July 2025 for new residents. Furthermore, it is expected that only 50% of new residents will be affected by higher upfront and ongoing costs. Once the Bill is closer to Royal Asset we will provide additional insights.
