How safe is your RAD?

Every day, Australians are moving homes to upgrade their accommodation, to relocate for work or family reasons or to try a different lifestyle. The move usually means selling an existing home or borrowing to buy a new home, or perhaps renting a new home.

The same concept applies if you can no longer live independently in your own home and make the move to residential aged care. This requires moving to a home owned by the care provider and you need to “buy” or “rent” a room in that home.

Just as the prices of private homes can vary widely, so can prices for aged care accommodation depending on location, type of accommodation and amenities – with prices potentially ranging from $100,000 to $2.5 million.

Tip: Go to www.myagedcare.gov.au and click on the “Find a Service” tab to search for services in your area and compare room prices.

Choosing a home is not just about cost. Five important questions to consider when choosing which aged care service suits you best are:

  1. Where do you want to live and what is important in relation to location, care and lifestyle?
  2. Can you afford the cost of the room and still generate enough cashflow to meet ongoing fees and living expenses?
  3. How does the cost compare to other suitable alternatives?
  4. How should you structure finances to meet your cashflow needs?
  5. What actions can you take to protect your estate?

The cost of a room in an aged care service is called the accommodation payment. This is quoted as a lump sum (Refundable Accommodation Deposit – RAD) which is like “buying a room” or a daily fee (Daily Accommodation Payment – DAP) which is like “renting a room”.

The RAD may seem like a large amount of money, but remember the amount paid is returned to you or your estate when you leave. It is only reduced if you allow the provider to take some of your ongoing fees out of the lump sum or fees are outstanding when you leave.

Think of it as “buying” a room with a guaranteed sale price that ensures you will not lose capital. You cannot lose your money even if your service provider goes into liquidation. Repayment is guaranteed by the Federal Government provided the service provider is an “approved provider”. You can check this status with the service provider or on the myagedcare website.

Financial advice can help you to check what level of accommodation payment you can afford and the options that are available to provide sufficient cashflow and protect your estate. Call us on 1300 NANNAS to make an appointment today to discuss options for you and/or your family.

Can you still rent your former home?

The rules for renting your former home became less favourable from 1 January 2016 but this does not mean you have to sell your former home to fund a move into aged care. You will just need to do the numbers more carefully.

The new rules

If you moved into residential care before 1 January 2016 and chose to pay some daily accommodation payment (DAP), any rental income you receive on your former home is exempt for both Centrelink/DVA and aged care calculations. This helped to maximise your pension and minimise your fees.

But if the move occurs on or after 1 January 2016 the rental income from your former home is now included as assessable income when calculating aged care fees. An exemption does still apply when calculating your age/service pension, but only if you pay some of your accommodation payment as a DAP.

The table below shows the outcomes for a move into care from 1 January 2016

Centrelink/DVA benefits Aged care fees (MTA)
Spouse still living in former home ·       Exempt asset

·       No income

·       Exempt asset

·       No income

Former home vacant or tenant pays no rent ·       Exempt asset for 2 years

·       No income

·       Assessed at capped value* unless tenant is protected person

·       No income

Tenant pays some rent and you pay RAD in full ·       Exempt asset for 2 years

·       Net income assessable

·       Assessed at capped value* unless tenant is protected person

·       Net income assessable

Tenant pays some rent and you pay some DAP ·       Exempt asset indefinitely

·       Income is exempt

·       Assessed at capped value* unless tenant is protected person

·       Net income assessable

* Capped value to 19 March 2016 is $157,987.20. Exempt if tenant meets protected person rules.

Case study

Elmer moves into residential care on 1 February 2015. His home is worth $520,000 and he has $30,000 in the bank. He rents his home for $24,000 per year after all expenses and pays his $300,000 accommodation payment fully as a DAP.

The rental income is exempt for Centrelink purposes but is assessable when calculating aged care fees. Including the full age pension, his annual income totals $47,067 and daily care fees are $27,954. He also pays $18,420 per year in DAP (at 6.14%), so his total fees are just less than his income.

However, with minimal cash reserves there is little margin for error or to cover any contingencies or personal expenses. Reverse mortgages and home equity options could help to manage cashflow and provide cash reserves.

If Elmer had moved into care before 1 January 2016 his care fees would have only been $17,469 per year as the rental income would have been exempt and a means-tested fee would not have applied.

The new rules have increased Elmer’s care fees by $10,485 but potentially, with careful management he could still keep his former home.

Do we need a China rule?

China passed a law in 2013 which requires children to visit parents over the age of 60 as well as provide emotional and financial support. Children can face fines or jail sentences for non-compliance.

This may seem a drastic measure but older parents often feel increasingly isolated and lonely.

Traditionally in Asian cultures the different generations lived together but current economic pressures mean this is changing. Under China’s one-child policy, sole children often have to move for work and may need to care for two ageing parents and possibly even grandparents or in-laws.

In Australia, baby boomers are falling into the “sandwich generation”. They are under pressure to look after elderly parents as well as adult children who can’t afford to move out.

Hopefully the extreme measures taken in China aren’t needed here in Australia, but loneliness and isolation are an increasing issue for older Australians. Home care and community support programs may help to give the elderly access to a wider support network and take some pressure off families.

Quick facts

The use of aged care services continues to grow and the options are expanding and improving. Some interesting facts (as at 30 June 2014):

  • The government spent $14.8 billion on aged care services in 2013/14
  • 189,283 residential care places and 66,148 home care packages were in operation
  • 69% of aged care residents were women
  • The average age of female residents was 85.8 while for male residents was 81.6
  • Behaviours (including dementia) is the leading reason for moving into residential care (67% of residents)
  • Not-for-profit organisations provide 57% of residential care places and 81% of home care packages

 

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