Topic 2: Things you need to know about paying for aged care
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Helping parents or elderly loved ones navigate the complex world of aged care can be both emotionally challenging and financially daunting.
As well as the prospect of losing independence, preparing for a move to a home care community or a residential aged care facility like a nursing home is one of the largest expenses we’ll all potentially face later in life. As with any major financial expense, it’s worth understanding the implications of funding aged care sooner rather than later, including doing some research and preparing accordingly.
In this article, we explore the indicative costs of aged care and some of the common ways of, and considerations related to, funding it.
What are the indicative costs of aged care?
While the government subsidises some aged care services in Australia, there is an expectation that the person going into a care facility will contribute to the cost of their care where they can afford to do so.
The cost of aged care is typically made up of a basic daily fee, a means-tested care fee, an accommodation payment and optional extra services fees.
The basic daily fee is payable by everyone moving into an aged care home, and is used to pay for day-to-day living costs such as meals, cleaning, laundry, heating and air-conditioning.
This fee is 85 per cent of the single person rate of the basic age pension. From 20 March 2018 to 19 September 2018, the basic daily fee is $50.16 per day or $702.24 per fortnight. This amount is indexed with the aged pension and applies even if the person going into care is part of a couple. The current age pension rates are available on the Department of Human Services website.
The means-tested care fee takes into account your loved one’s assessed income and assets, and may be paid in addition to the basic daily fee, accommodation costs and fees for additional services.
The Department of Human Services assesses how much each individual needs to pay. The current maximum amount of means-tested care fee an aged care resident can be asked to pay is $26,566.54 a year capped at a life time limit of $63,759.75. These limits are indexed in March and September every year.
Accommodation costs typically form the largest component of aged care fees, and are paid in addition to the basic daily fee and the means-tested care fee. This component is also means-tested when an individual permanently enters residential aged care and may be subsidised by the government.
If your loved one is not eligible for assistance with their accommodation, they may be asked to pay an ‘accommodation payment’, which is either a refundable accommodation deposit (RAD), a daily accommodation payment (DAP), or a combination of both.
The amount of refundable deposits can vary widely, depending on factors such as where the aged care facility is located and the nature of the services offered.
Janet Manzanero-Caruana, Technical Consultant at BT Financial Group, notes that in Sydney for example, it’s not uncommon for some refundable accommodation deposits to be up around the $550,000 mark or higher. “The costs can be substantial,” she says.
The government’s MyAgedCare website outlines all of these fees in more detail – and provides a useful fee estimator for aged care. Of course, it’s worth researching the actual cost of aged care facilities in areas where your loved one is looking to live, as well as discussing the various funding options with expert care providers and your financial adviser.
Considerations in the early stages of the aged care journey
According to Manzanero-Caruana, there are many financial considerations when it comes to funding both the regular aged care fees and any upfront accommodation costs – and it’s critical to start discussions with your loved one about their options well in advance of when they’re likely to need them.
She also says that the significance of the aged care means test at the time of entry should not be understated, as many have limited resources to pay for up-front and ongoing aged care.
“The aged care means test is based on a person’s income and assets (or if the person is partnered, half of the couple’s combined income and assets). It calculates a person’s daily means tested amount (MTA),” Manzanero-Caruana says.
“If the MTA exceeds the maximum accommodation supplement determined by the Government, the excess amount becomes the person’s daily means tested care fee which is subject to annual and lifetime limits.”
“This aged care means test that applies when entering residential aged care is valid for 120 days. It is significant as it determines whether a person will pay the full accommodation costs or receive a Government subsidy for their accommodation.”
Working with a financial adviser at this stage of the process can help to identify strategies that may reduce an individual’s assessed income and assets before this first assessment.
According to Manzanero-Caruana, some of these strategies may include:
- Determining whether the home is occupied by a ‘protected person’ to allow exemption of the home from the means test
- Gifting property, cash or other assets up to allowed limits
- Investment in an annuity that receives concessional social security treatment
- Purchase of funeral bonds up to the exempt limit
- Purchasing prepaid funeral plans
- Purchasing burial plots
“Being a low means resident can provide substantial savings,” Manzanero-Caruana says.
Reverse mortgages and other equity-accessing products
Some of the other ways people choose to fund aged care include reverse mortgages or alternative equity-accessing products.
A reverse mortgage is a type of home loan that allows someone to borrow money using the equity in their home as security. The loan can be taken as a lump sum, a regular income stream, a line of credit or a combination of these options.
Manzanero-Caruana explains that there are a few reverse mortgages where no repayments are required until the individual passes away, however some lenders don’t allow their loans to be used for an accommodation deposit. Loans may have a loan term or may require repayments once a certain Loan to Value Ratio is reached.
Selling or renting out the family home
Selling the family home is a common way of funding a move to aged care – but the decision to do so will depend on your loved one’s personal circumstances and what fees you’re able to negotiate with the home they’re moving into.
According to the government’s MoneySmart website, if you don’t want to sell the family home but the home care provider has asked for a refundable accommodation deposit or contribution to be made, they may allow you to make a periodic payment instead.
“If you move into a residential care facility without selling your home, it will be exempt from the age pension assets test for two years from the date you move into care,” MoneySmart says. This two-year time buffer will give you some time to consider what to do with your loved one’s home before it affects their means test limits.
Some people choose to rent out the family home to fund their periodic accommodation payments. In this instance, rental income will count towards the Aged Care and Centrelink income and assets test. If your loved one entered aged care before 1 January 2016 they may be assessed under more generous rules.
The MoneySmart website explains the nuances of selling and renting the family home to fund aged care.
Adult children lending their parents money
Manzanero-Caruana says that she sees many instances of adult children either gifting or lending their parents money to fund their ongoing aged care costs, with the expectation that the funds will be repaid from the parent’s estate once they pass away.
“In this instance she says, it’s important that any agreements around loans or gifted monies are written down to reduce the likelihood of family disputes in the future.
The transition into aged care is certainly complex, and is worth being as prepared as possible for. Manzanero-Caruana believes all Australians should be giving some thought to their future aged care needs, and discussing their wishes with both their families and financial advisers.
“Even for those who are working, all generations need to look at this issue of funding aged care. Over time, the subsidies will decrease. The younger generation will need to prepare for this,” she says.
“Pre-retirees will also need to consider what they’ll do in 25-30 years’ time, when they’re not likely to be well and may need to consider essential aged care. They should also look at their parent’s situation and what type of arrangements are in place (or need to be).
“When it comes to the point of needing aged care, you’re at your most vulnerable point in life. Being prepared ensures that you are well taken care of, in the way you would like to be taken care of. You don’t want to be in a miserable place.”
Need help with organising your finances to afford the costs of aged care? Define your future by speaking to a financial adviser.
Disclaimer: This has been prepared by BT Financial Group, a division of Westpac Banking Corporation ABN 33 007 457 141.This article may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. The information provided is factual only and does not constitute financial product advice. Before acting on it, you should seek independent advice about its appropriateness to your objectives, financial situation and needs. It provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. BTFG cannot give tax advice. Any tax considerations outlined in this publication are general statements, based on an interpretation of the current tax law, and do not constitute tax advice. Information current as at March 2018.