The prospect of moving into an aged care facility is something many Baby Boomers are contemplating as they age, whether it be for themselves or their elderly relatives.
While there’s a lot to think about when making a big move like this, method of payment is one of the most pressing, namely, whether it’s best to fork out the cash upfront or stagger the payments for the facility as you go.
There are pros and cons to both options and according to prominent lawyer Brian Herd, it all depends on an individual’s financial situation and what’s in their will.
The CRH Law partner said it’s best to first seek financial advice from someone who is experienced in financing aged care, as the method of payment chosen could ultimately impact Centrelink entitlements such as the Age Pension or Department of Veterans’ Affairs payments.
Contrary to previous patterns, there is now a trend for an increasing number of people to pay via the pay as you go (PAYG) method rather than handing over a lump sum upfront, which is known as a refundable accommodation deposit (RAD). However, this changing trend doesn’t necessarily mean that is the right option for everyone.
“Using the old Arnott’s biscuits mantra, ‘there is no substitute for quality’,” Herd told Starts at 60. “A person and their family would be bonkers not to obtain good-quality financial advice on the options before, not after, any care commitments are made or signed.”
The lawyer explained the PAYG road is usually the best option for couples who are separated by circumstance, for example, when one person stays at home and the other moves into aged care.
This is because it doesn’t require a large amount of upfront cash, limiting the problems associated with finding that cash, such as selling the home.
It also helps preserve other assets, including share portfolios or withdrawal of superannuation, as well as what the person has detailed in their will.
However, for those who do choose to PAYG there are some down sides to be wary of, like the interest paid on repayments which currently sits at 5.96 per cent per annum.
On top of this, it requires steady cash flow for the resident to rely on because, in addition to the basic daily fee and potentially the means-tested fee, they would have to fund an ongoing daily accommodation payment (DAP) which is about $60 per day based on the average RAD.
As for paying upfront, this option is generally chosen by those who have managed to save up a whole lot of money throughout their life or those willing to sell their family home to fund their aged care accomodation.
If a person can afford this option, any money remaining on their account after they die or move out is fully refundable, less any monies they may owe to the facility for other reasons, such as care fees.
“The refund is government guaranteed which means that if an aged care facility goes belly up and can’t refund it, a resident will still get the refund from the government,” Herd explained.
“This option also does not a drain on cash flow and, in fact, if a resident finds it difficult to meet other costs in aged care such as care fees, those fees can be drawn down from the RAD.”
The downsides to this option can be quite significant though, especially if you rely on government benefits such as the Age Pension. The average upfront amount for aged care housing is around $360,000. If you don’t have enough money in the bank to pay this sum and are required to sell the family home you need to consider how this could affect any future government payments.
If the family home is sold to pay the RAD, there may be still be a significant amount of cash left over afterwards, which can create both tax and pension problems. The family home is an exempt asset for taxation and pension purposes, but once you’ve sold it any cash left over will be means tested by the government to determine how much you’re eligible to receive.
Additionally, paying upfront may also require borrowing large sums of money late in life on what is known as a reverse mortgage with relatively high interest rates.
To preserve the family home, it may require adult children to contribute to the RAD, which can complicate family relationships particularly because the law generally requires the RAD to be refunded to the resident or their estate and not to the person or people who actually paid it.
This tangling of family finances is, according to Herd, one of the biggest problems faced by those trying to sort out aged care fees for loved ones.
“The classic example is in the blended family where each of the spouses have agreed to keep their assets separate (as is common) and have made wills giving their respective assets to their respective children,” he explained.
“Then one of the spouses has to go into aged care and the other spouse, being true to their matrimonial vows, pays their RAD. Effectively that means the paying spouse has given the RAD to their stepchildren, which is where it will usually end up when the spouse in aged care dies. The paying spouse’s children usually go apoplectic when they find out.”
In the end it is a personal decision on whether you choose to pay upfront or PAYG, but Herd advises that no matter the financial or familial situation it’s best to seek advice before making a decision.
Important information: The information provided on this website is of a general nature and for information purposes only. It does not take into account your objectives, financial situation or needs. It is not financial product advice and must not be relied upon as such. Before making any financial decision you should determine whether the information is appropriate in terms of your particular circumstances and seek advice from an independent licensed financial services professional.