In March, the Royal Commission into Aged Care Quality and Safety suspended all hearings due to the Covid-19 pandemic, but enough hearings had taken place for a clear picture to develop about the likely future of the industry.
One thing is almost certain – the cost of aged care will go up. The commissioners will most likely highlight inadequate carer-to-resident ratios and under-qualified staff in many places. The costs to rectify these will be considerable, as well as the inevitable increase in compliance costs. The government will not want to pay out much more to fund aged care so the majority of these increases in costs will be passed on to consumers.
Aged care remains very labour-intensive, land is expensive to buy and buildings are expensive to build and maintain. The owners of such facilities expect to make a return on their investment.
One other thing is certain – there will be no slowing down in the ageing of Australia’s population, so demand for aged care beds will outstrip supply and Retirement Accomodation Deposits (RADs formerly known as bonds) will increase. A RAD is a refundable sum that covers the cost of aged care accommodation. As Australians live longer, more and more of us will end up in aged care. The number of people in permanent aged care in Australia is expected to nearly triple in the next 30 years, from around 250,000 today to 700,000 in 2050.
The aged care industry is very complicated and many decisions must be made, often involving large sums of money. Here are the ten most common questions that we hear at Joseph Palmer & Sons, and our answers to them.
Q: Is the Refundable Accommodation Deposit (RAD, formerly known as a bond) negotiable?
A: Yes. 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 at times can be as much as halved. Willingness to negotiate on RADs depends very much on the demand for beds – and the supply of beds – in a particular aged care facility.
Q: What alternatives are there for paying the RAD?
A: Many aged care facilities prefer the RAD be paid as a lump sum up front. However, it is possible to choose to pay interest payments only or pay with a combination of lump sum and interest payments. A bank guarantee is not an alternative. The interest rates you pay are set under the Aged Care Act and currently 4.89 per cent.
Q: Will my family get all of the RAD back?
A: In a government-accredited aged care facility, the RAD 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 fully refundable and generally repaid 14 days after a person leaves the facility or, where the resident has passed away, to their estate when probate has been granted.
Q: Will I need to sell the family home to pay the RAD?
A: This is the most common question we get and the short answer is, not necessarily. 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.
For Age Pension purposes, if you move into care, the former home’s value will be excluded from the Age Pension assets test for two years, although any rental income will be assessable under the income test. The value of the home is capped at $171,535 for aged care means testing and any rental income is assessable.
Q: What is the Means Tested Fee?
A: The Means Tested Fee is set by the government and collected by the aged care facility, and is based on an individual assessment for each resident. It is an attempt by the government to ask residents with the financial capacity to contribute to the cost of their care. This fee can range from nothing to a maximum $254 per day, capped at $28,087 per annum or $67,409 over a lifetime (which is equivalent to just over two years of payments).
Q: Why does the government charge different Means Tested Fees to residents?
A: While all residents pay the same standard daily care fee ($52.25 per day, or 85 per cent of the full age pension), the Means Tested Fee varies from person to person depending on their assets.
Q: Why is the Means Tested Fee so high and how do I reduce it?
A: The Means Tested Fee is based upon the income and assets of the aged care resident, so it increases as the resident’s assessable assets and income increase. For example, a resident on a part-Age Pension with assets totalling $250,000 and deemed to be earning $29,108 per year (including the pension) will pay $2.20 per day ($803 per year) in aged care, while a resident with assets totalling $1.25 million and deemed to be earning $27,089 per year will pay $52.61 per day ($19,201 per year).
One option to reduce the Means Tested Fee is to buy an aged care annuity, if appropriate. We recommend financial advice in relation to this product.
Q: What is the Extra Services Fee and should I pay it?
A: The Extra Services Fee, which can be as much as $120 per day, is supposed to give the resident extra services, including more activities 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. This fee, too, may be negotiated.
Q: Paying daily fees will impact on my cash flow. What strategies are there for dealing with this?
A: It is possible to elect to have some or all of the daily fees deducted from the RAD to minimise the impact on your cashflow. This means of course that less of the RAD will be returned at the end of the care period.
Q: What implications are there for my social security or pension?
A: 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.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial situation, objectives or needs. That means it’s not financial product advice and shouldn’t be relied upon as if it is. Before making a financial decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services advice.