I’m convinced residential aged care, where one member of a couple needs care and the other is still capable of living at home, is the biggest financial challenge retirees face. The cost of residential aged care is broken up into three parts, and we’re going to look at each one in detail. The three parts are room, care and additional services.
Room
The easiest way to think about the cost of a room is that you either ‘buy’ the right to occupy the room by paying the advertised rate up front, or you ‘rent’ the room by paying a prescribed interest rate multiplied by the cost of the room. That interest rate is fixed at the time you become a permanent resident and will only change if you leave the aged care facility and enter another one.
For example, a room may cost $600,000. If you have the means, you could pay the $600,000 upfront. Alternatively, you could pay the interest rate of 8.17 per cent (current at June 2025) on $600,000, which is $49,020 per annum (often charged in monthly instalments).
You can also do combination of both, so part ‘buy’ the room and part ‘rent’ the room.
If you elect to pay the full cost of the room, the facility will deduct 2 per cent every year of the room cost from the lump sum payment you have made for a maximum of five years. So, if you reside in care for long enough, upon leaving (either voluntarily or as a result of death), only 90 per cent of the fee you paid for the room will be returned to you/your estate. The facility keeps the other 10 per cent.
If you elect to pay the cost of the room via interest payment, the interest rate is fixed. However, the cost of the room that the interest rate is multiplied by will be indexed up each year, which means your interest bill will increase every year.
Care
The cost of your care is broken up into two parts. The first, being the basic daily fee that every resident pays, is set at 85 per cent of the full rate of the single age pension and increases every six months in line with increases to the age pension. As at March 2025, the basic daily fee was $63.57 per day or the equivalent of $23,203.05 per annum. Even aged care residents with very little in the way of assets will still have the means to pay this fee, as the resident will be in receipt of a full age pension.
The second part of your care cost, known as the Hoteling Supplement Contribution (HSC), is means tested – the more financial means you have, the more you will be asked to contribute to the cost of your own care (with less funded by the Government).
There are two different parts to the means testing, but all you really need to know is that the more assets you have or the more income you have, the more you will be asked to pay up to a daily limit of $12.55 per day.
The final part of your care cost, known as the non-clinical care contribution (NCCC), replaces what was the means tested care fee. Like the Hoteling Supplement Contribution, it is also means tested based on the residents income and assets up to a daily limit of $101.16. There are lifetime caps on non-clinical care contribution at a lifetime limit of $130,000 (indexed) or four years in care. If the resident meets either one of these limits, their means testing fee will stop.
How you choose to structure the payment of the room cost will have an impact on the result of your means testing.
Additional services
Over and above the basics of residing in care, you can choose to take up some of the additional services the facility may offer. This might be things like wine with dinner, Foxtel or Netflix, or some other benefits the facility offers. These services cannot be a condition of entry (as they often were in the past). The agreement must outline the cost of each higher service to be delivered, the standard, frequency and how they will be charged. Residents cannot be asked to pay for a service they cannot use.
Do you have the means?
Some people enter aged care with what’s called low means. Their assets are at such a level that following a Services Australia assessment, they determine the resident cannot afford the advertised price for a room in the aged care facility.
If that is the case, a separate calculation is done based on the assets the resident does have to determine the amount of money the resident can afford to pay. This amount can then be paid as an ongoing daily amount or converted to a lump sum and paid in one hit.
If the resident’s assets (or their half share of combined assets with their partner) are:
· below $61,500, they won’t have to pay anything towards the cost of the room.
· above $61,500 but below $206,039.20, they will have to contribute something towards the cost of the room, based on a calculation of what they can afford to pay.
· above $206,039.20, they will have to pay the advertised price for the room.
Check the limits
You should check the various limits at the time you are assisting someone with the aged care system. Things like home care packages, basic daily fees and the capped value of your home all get increased over time. Having the most up-to-date information at the time you need it will ensure you can structure your finances to optimise your savings. Being aware of what might affect your full or part age pension lets you make informed choices that allow you to enjoy this period of life without financial worry.
Edited extract from Retire life ready: Practical steps to build your wealth and live your ideal retirement by James Wrigley (Wiley, $34.95), available 29 October at all leading retailers.
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