Choosing an optimal aged care plan

Over the past year or two, the aged-care sector has been bashed from pillar to post. The interim report from the Aged-Care Royal Commission was blunt in its condemnation of some parts of the industry. The COVID-19 pandemic has hit the sector hard, with hundreds of deaths in aged-care residences. Many residents have opted to leave the sector.

Deloitte Access Economics released a report that said that bringing the sector up to scratch – including providing four-star staffing levels – would require every Australian to pay an extra percentage point of income tax. The report was commissioned by the Royal Commission as it hones its plans for a redesign of the system, ahead of its final report due in February next year.

For those who are entering aged care, and tens of thousands of Australians will continue to do so, here are several big decisions to be made. One is whether to pay a lump-sum upfront, known as a refundable accommodation deposit (RAD, formerly known as a bond) or pay a daily fee known as the daily accommodation payment (DAP). Another option is to part-pay the RAD and pay a reduced DAP. The RAD is a government-guaranteed lump-sum payment for a bed and can range from as low as $200,000 to more than $2 million. The RAD is refunded when the resident dies or leaves the facility.

While we traditionally invoke the blessing, “Admeah v’esrim (may you live to be 120), the unfortunate reality is that aged care is typically not a period of many years. The key question is: Is it worth selling things to finance a RAD? People with assessable assets of less than $171,535.20 cannot be asked to pay a RAD. The interest rate used to calculate the DAP is set by the government based upon the movement in the 90-day Bank Accepted Bill rate and is reviewed every three months. The interest rate as at July 2021 is 4.04 per cent per annum and given where interest rates are heading, it may be reduced even further.

The decision whether to pay a RAD or a DAP – or a combination of both – will depend on the new resident’s financial situation. Here are some examples:

● If a resident has $300,000 in the bank earning less than 1 per cent, those funds clearly should be used to pay a RAD. Forgoing interest of 1 per cent to avoid paying at a rate of 4.04 per cent is an easy decision to make.

● For a resident who has a family home that they or their family wishes to keep, and they have sufficient income and savings, they may prefer to pay a DAP, which would allow them to keep the family home.

● If a resident has a share portfolio or other financial investments that generate an annual income of 5 per cent or more, they may prefer to keep those investments and pay a DAP instead, avoiding any potential capital gains tax from disposing of the investments.

● If a resident’s income provides sufficient cash flow to cover the various aged-care fees, then DAPs are often better (for instance, they may have a healthy defined benefit superannuation pension if they had a long career with one employer). Residents can change their minds as time passes. If the resident has not paid the full RAD up front and decides they would like to pay more, they can top it up at any time and the DAP will be adjusted downwards. Conversely, if they have paid a RAD and cash flow gets tight, they can elect to have some or all of the monthly fees deducted from the lump sum.

What do aged-care facilities prefer – RADs or DAPs? Facilities are limited to what they can do with funds from RADs and may be faced with investing those funds at the current bank rate – around 1 per cent. Owners of small aged-care facilities that have already done up their rooms may prefer the greater cash flow that derive from DAPs, which they get to keep. Owners that wish to build or expand their facilities, or buy land on which to build, will more likely prefer residents to pay RADs, which represent a form of lump-sum cheap finance, certainly cheaper than a bank loan.

Rodney Horin is managing director of Joseph Palmer and Sons (Vic), financial advisers and investment managers with an expertise in aged-care financial advice. He can be contacted on (03) 9601 6847. Visit jpalmer.com.au/services/aged-care

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