When the time comes for a loved one to enter aged care, the common thought is – we need to sell the house to afford it! This is certainly not always the case.
Understanding Aged Care Accommodation Costs
One of the key considerations when looking into aged care is the main cost of accommodation, typically referred to as the Refundable Accommodation Deposit (RAD) or the Daily Accommodation Payment (DAP). Most individuals moving into aged care homes are considered market price payers. This means that they will pay the accommodation cost determined by the aged care facility. Accommodation costs can be paid as a lump sum (RAD), a daily payment (DAP) or a combination of both. In major cities, the market price often hovers around $550,000, although it can reach as high as $2.8 million. To give some local perspective – BlueCross in Surrey Hills entry level room has a RAD of $600,000, Arcare in Malvern have a deluxe room for $950,000.
Selling the Family Home: A Common Misconception
Many people believe that they must sell the family home to cover the RAD. However, it’s essential to understand that this is not a requirement. The decision to pay the RAD in full or in part is entirely up to you. Any unpaid portion of the RAD incurs a Daily Accommodation Payment (DAP), which accrues interest at a government-set rate. Currently, this rate stands at 8.15% per annum. if your RAD is $950,000 and you decide to pay $200,000 upfront, the DAP would amount be $167.46 per day.
Benefits of Paying the RAD
Many families choose to pay the RAD to retain the family home, which can have various financial advantages. From a pension perspective, the home is exempt for the first two years after moving into aged care. In terms of means testing, the home’s value is only assessed up to a maximum of $197,735 (correct Sept 23) except in cases where a protected person resides in the home.
A Collective Approach to Financing Aged Care
Some families opt for a collective approach to financing aged care for a parent. They recognise that paying interest at 8.15% (Current as of 1st Oct, 2023) on the unpaid RAD amount is not a cost-effective strategy. To counter this, they pool resources from investments that are unlikely to generate returns exceeding 8%. By paying the RAD, they forgo the interest they could have earned but offset the 8.15% liability. From a collective family standpoint, this approach often proves to be more beneficial when everyone is on the same page.
The Impact on Means-Tested Care Fees
An often-overlooked factor in these decisions is the effect of paying the RAD on means-tested care fees. While the RAD is exempt when calculating the pension entitlement, it is considered when determining the means-tested care fee. This doesn’t necessarily nullify the savings of not paying the DAP, but it will affect the overall benefit.
Considerations When Moving or Leaving the Aged Care Facility
Lastly, it’s important to think about the implications when your loved ones leave aged care. Any RAD paid will be refunded to them or their estate. However, if the money paid is considered a loan rather than a gift, it should be documented as such – preferably by a legal professional. Unlike other assets, a loan will not reduce the asset assessment for means testing, but it can prevent disputes within the estate when other beneficiaries perceive it as a gift.
Understanding the myriad of financial aspects of aged care accommodation is crucial for making informed decisions that align with your family’s financial goals and circumstances. By carefully weighing the options and considering the long-term implications, we can help you navigate the aged care system with greater confidence and financial security. When receiving aged care financial advice, we lay out all your options and outcomes so you can get a clear picture of all the options available to your family. You can contact us here.