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Analysis: Aged-care’s most common finance questions

As people live longer, more and more will end up in aged-care. The number of people in permanent aged care in Australia is expected to more than triple in the next 35 years, from 225,000 today to 700,000 in 2050.

The aged-care industry is complicated and many decisions must be made, often involving large sums of money.

Here are some answers to the most common questions we hear.

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 can be as much as halved. Willingness to negotiate on RADs depends on the demand and 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 be paid as a lump sum up front; however, it is possible 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 a RAD is now generally repaid in full at the end of the care period.

5) What is the Centrelink fee?
The Centrelink fee is a means-tested charge set by the government and collected by the aged-care facility. 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 to a maximum of $241.92 a day.

6) Why is the Centrelink fee so high and how do I reduce it?
The fee is based on the income and assets of the aged-care resident, so it increases as assets and deemed income increase. For example, a person on a part Age Pension with assets totalling $200,000 and deemed to be earning just over $27,500 a year will pay $2.a per day ($812 a year) in aged care, while a person with assets totalling $1,200,000 and deemed to be earning just over $38,000 a year will pay $68.66 a day ($25,061 a year). Two key ways of reducing the Centrelink fee are paying a higher RAD and buying an aged-care annuity. There is no link between the actual cost of a person’s care and the Centrelink fee they pay.

7) Why does the government tax people in aged care?
The standard daily care fee for a resident in an aged-care facility ($47.86 a day) is set at 85 per cent of the full Age Pension. However, it does not cover the full care costs of the resident. The government pays a subsidy for each resident’s care needs to make up the shortfall. The Centrelink fee enables the government to provide this subsidy.

8) What is the Extra Services Fee and should I pay it?
The Extra Services Fee, which can be as much as $120 a day, is supposed to give the patient extra services, including more attention and access to people like podiatrists, hairdressers, etc. If your aged-care facility is charging an Extra Services Fee, you should ask what services are being delivered and assess whether or not you are receiving value for money.

9) Paying the RAD will affect 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. 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 pension?
The RAD is an excluded asset for social security purposes. Therefore, in some cases, where existing cash is used to pay for a RAD, it can result in a new or increased 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 a 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, like 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. If a home is rented out before January 1, 2017, its value will be excluded from the age pension assets test and the rental income will be excluded from the income test. The value of the home is capped at $157,987 for aged care means testing.

John Rawling and Rod Horin are aged-care consultants at Joseph Palmer & Sons (Vic), investment managers and aged-care specialists.

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4 comments

  1. One other question might be added to no 11 – what if I have bequeathed my home to someone in my Will but I sell my home to pay the RAD?

  2. Anton hutchinson

    I can answer that, your RAD will be refunded in full to your estate upon your passing. Most facilities repay this within 14 days and t hat t hen will directed in acordance with your Will.

  3. Great work guys. Love to see the same sort of information for Home Care Packages??