How will you pay for aged care: explained

By Lucy Dean

November 24 2017
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By 2060, about a quarter of all Australians will be older than 65 so families need to understand how to engage with a “rapidly” growing aged care sector.

That’s according to the managing director and senior financial planner at Profile Financial Services. Phillip Win this week said that aged care is “an area that is growing rapidly” and which also “struggles to keep up with demand”.

However, he told families and individuals considering a move into aged care that there are three broad areas to think about when it comes to how to pay for it.

1. Accommodation payment

“To move into an aged care home, you will need to cover the costs for establishing residency in the facility,” he explained.

The first option is to make a lump sum payment. This is a Refundable Accommodation Deposit (RAD) that will be returned to the inhabitant or their estate once they leave the accommodation.

“Most facilities charge a RAD of around $300,000 but the RAD can be any amount up to $550,000 (or higher with government approval),” he said, noting that fees and move out costs will be deducted from the refunded amount.

As this fee “can be difficult” for some to pay, there is another option. Mr Win explained that inhabitants can “borrow” the deposit from the service and instead pay a daily Accommodation Payment (DAP).

“The facility calculates the DAP based on the RAD and the government-chosen interest rate (5.73 per cent as at 1 July 2017).

“For example, if a facility has a RAD of $300,000 the DAP would be $47.10 per day ($300,000 x 5.73 per cent/ 365 = $47.10).”

However, this option is still out of financial reach for some families, he acknowledged.

Clients in this category may qualify for ‘low-means’ care as long as they have less than $160,000 in assets and receive the full age pension.

“You will then have the option to pay a Daily Accommodation Contribution (DAC) which will be less than your DAP,” he explained.

“You should consider if low-means is right for you, as you will not be receiving the nice new room in the facility! Once you are classified as low-means, it cannot be undone, unless you move to a new facility.”

2. The everyday costs

According to government estimates, the daily cost of aged care for an individual is $244.97 each day. That’s nearly $90,000 in a year.

“When you consider the full age pension for a single is only $21,071, you can easily see the government is forced to supplement some of the costs for care,” he pointed out.

The first cost is the “Basic Daily Fee” which is paid by everyone who lives in an aged care facility. However, the calculation of the fee is controlled by the government at 85 per cent of the single person rate of basic age pension which is currently $49.07 a day.

The second cost is the “Means Tested Care Fee”. This fee is based off the resident’s current income and assets.

“The more assets you have, the higher the Means Tested Care Fee,” Mr Win explained. “For example, a non-home owner with approximately $250,000 of assets would pay a Means Tested Care Fee of around $15 per day.”

However, there are caps on the costs for residents who entered care prior to 1 July 2014. The annual cap is $26,380 while the lifetime cap is $63,313.

3. Cash flow

“The final phase of the aged care process is funding the ongoing costs. This is an area where a financial adviser can provide great assistance with the many questions that arise,” Mr Win said.

“For starters, the most common concern revolves around the family home. How is the home assessed? Does it have to be sold to provide cash flow?”

He explained that some alternatives can be used to release equity from their home or to help the children service the costs.

“Ultimately, the right decisions can reduce fees, increase entitlements, and minimise tax issues. It is also often possible to negotiate deals with providers.”

He also advised that people considering their cash flow and strategy also think about their wills and the way their estates are allocated.

“For example, if a home was originally gifted to a child as part of their inheritance, but then that home needs to be sold to fund aged care, then the will may need to be updated to reflect that change.”

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