A better understanding of the cost of aged care can’t come soon enough.
As people live longer, more will end up in aged care. The number of people in permanent aged care in Australia is expected to triple in the next 35 years, from 225,000 today to 700,000 in 2050.
The aged-care industry is very complicated and many decisions must be made, often involving large sums of money. Aged care consultants, John Rawling and Rod Horin answer the 11 most common questions they receive.
1. Why is aged care so expensive?
Aged care is very labour intensive, and land and buildings are expensive to buy and maintain. The owners of such facilities expect to make a return on their investment. From a client’s point of view, typical fees include accommodation deposits and charges, daily fees, extra services fees and means-tested fees.
2. Is the accommodation deposit negotiable?
Yes. Accommodation deposits (known as Refundable Accommodation Deposits (RADs)) can be as high as $2 million to secure a bed in an aged-care facility. In many cases these RADs are negotiable and at times can be as much as halved. Willingness to negotiate on RADs depends very much on the demand for beds – and the supply of beds – in a particular aged-care facility.
3. What alternatives are there for paying the RAD?
Many aged-care facilities prefer the RAD to be paid as a lump sum upfront. However, it is possible to choose to pay interest payments only or pay with a combination of lump sum and interest payments. A bank guarantee is not an alternative.
4. Will the family get all of the RAD back?
In a government-accredited aged-care facility, the accommodation deposit is fully government guaranteed. Before July 2014, the accommodation bond repaid to the family would be reduced by retention amounts deducted by the aged-care facility. Since July 2014, any lump sum paid as an RAD is now generally repaid in full at the end of the care period.
5. Why does the Government charge different daily care fees to residents?
The standard daily care fee for a resident in an aged-care facility ($48.25 per day) is set at 85 per cent of the full Age Pension. All residents must pay this fee. However, it does not cover the full care costs of the resident. The Government may ask the resident to pay an additional amount as a means-tested fee and then pays a subsidy for each resident’s care needs to make up any shortfall.
6. What is the means-tested fee?
The means-tested fee is set by the Government and collected by the aged-care facility based on an individual assessment for each resident. It is an attempt by the Government to ask residents with the financial capacity to contribute to the cost of care. This fee can range from nothing, up to a maximum $241.92 per day.
7. Why is the means-tested fee so high and how do I reduce it?
The means-tested fee is based upon the income and assets of the aged-care resident, so it increases as the resident’s assessable assets and income increase. For example, a resident on a part Age Pension with assets totalling $200,000, and deemed to be earning $27,713 per year, will pay $2.19 per day ($799 per year) in aged care, while a resident with assets totalling $1.2 million, and deemed to be earning $38,271 per year will pay $68.29 per day ($24,926 per year). One option to reduce the means-tested fee is to buy an aged-care annuity, if appropriate – advice is important.
8. What is the extra services fee and should I pay it?
The extra services fee, which can be as much as $120 per day, is supposed to give the resident extra services, including more attention and access to service providers, such as podiatrists, hairdressers, etc. If your aged-care facility is charging an extra services fee, you should ask which services are being delivered and assess whether or not you are receiving value for money.
9. Paying daily fees will impact on my cash flow. What strategies are there for dealing with this?
It is possible to negotiate to pay some or all of the daily fees from the RAD to minimise the impact on your cashflow. This means of course that less of the RAD will be returned at the end of the care period.
10. What implications are there for my social security or Age Pension?
The RAD is an excluded asset for social security purposes. Therefore, in some cases, where existing cash is used to pay for an RAD, it can result in a new or increased Age Pension entitlement. More often, a family home is sold to fund the RAD. In this case, while the home is excluded, the proceeds from its sale are counted as an asset. As a result, the cash remaining after paying the RAD can often result in an Age Pension being reduced or lost entirely. However, there are ways to maintain, or even increase, one’s current entitlements.
11. Will I need to sell the family home to pay the RAD?
Not necessarily. Four key questions are: Do you need to sell the home? Can you afford to keep it? What happens if you rent it out? and Will your decision have an impact on any pension or aged care fees? The family home is often a couple’s most valuable asset and many advisers wrongly assume that it needs to be sold to provide funds for RADs. The key driver is to make sure that, as with any valuable asset, the home generates a financial return. This return takes the form of rental income and capital growth (which RADs certainly don’t provide). The home is treated on a concessional basis for the Age Pension and aged care fees. For Age Pension purposes if you move into care before 1 January 2017 the former home’s value may be excluded from the Age Pension assets test and income may also be exempt (depending on circumstances). The value of the home is capped at $157,987 for aged care means testing and rental income is assessable if you moved into care from 1 January 2016.
John Rawling and Rod Horin are aged-care consultants at Joseph Palmer & Sons (Vic), investment managers and aged-care specialists.