Noel Whittaker's Blog Aged care is an incredibly complex topic. Today I will try to simplify a key aspect of it for you: your options for paying up-front or ongoing fees for your accommodation.
When moving into aged care, most people will pay the market price for their accommodation, or negotiate a lower price. Retirees with limited means pay an accommodation cost calculated by the government. Whatever the sum, you have the choice of paying a lump sum Refundable Accommodation Deposit (RAD), a rent-style Daily Accommodation Payment (DAP), or any combination of the two.
All residents also pay a basic daily fee of $52.25 a day, and possibly a means tested daily care fee – that depends on your assets and income. But we are going to focus on RADs and DAPs in this column.
Any RAD not paid up-front accrues interest at a rate set by the government – currently 4.10% a year. The DAP is simply the interest on the unpaid balance of the RAD. For example, if the RAD was $500,000 and you put down $200,000, the DAP would be $34 a day. If you paid no RAD, the DAP would be $56 a day; and if you paid the RAD in full there would be no DAP.
When you leave the aged care facility, your RAD will normally be refunded to you or your estate – so if someone else has helped to pay the RAD, a loan agreement is vital.
Because the RAD remains your money, you can choose to deduct your DAP from your RAD. Continuing the same example, you could pay $200,000 as a RAD and then have $34 a day DAP deducted from the $200,000. This option means that the RAD will keep decreasing and the DAP will slowly increase. So you may start out deducting $34 a day from $200,000, but after a year the $200,000 has reduced to around $187,500 and the DAP has increased to $35 a day. After five years the RAD would be down to $132,000 and the DAP would have risen to $41 a day. It’s like a kind of reverse mortgage.
Some people use rules of thumb like, “If I can earn more in my investments then I’m better off paying by DAP,” but it’s really too complex for that.
One benefit of paying a RAD is that it is an exempt asset for pension purposes. So, if you receive a part age pension, depending on your circumstances, paying a RAD may increase your pension and more than offset what you could be earning on those investments. But the RAD is not exempt for means tested daily care fees: it is earning an effective 4.10% by offsetting the cost of the DAP.
The main benefit of paying by DAP is that you don’t need to come up with a lump sum. In addition, the interest rate is in line with other lending rates and borrowing a bit each month is cheaper than borrowing a lump sum. But if you pay solely by DAP it can become hard on your cash flow.
If you are a homeowner, much will hinge on whether you keep or sell your home. If kept, the maximum value included for means tested fees is $171,535, and its value is exempt from age pension calculations for two years. If sold, money in the RAD and any surplus funds will count for aged care means testing and the surplus funds will be assessable for the pension.
Some people think the aged care facility or government will force them to sell their home and pay a bond, but that’s not true. How you pay, and whether you keep or sell your home is up to you.
Paying by a combination of RAD and DAP is increasingly popular. Reasons include preserving age pension payments, minimising aged care costs, estate planning reasons and to keep the home if you don’t want to sell it, or can’t.
How you pay for your aged care accommodation can have a huge impact on all these areas. Because it is so complex, it is well worth seeking advice from a financial planner who specialises in retirement living and aged care.