When you begin to look at funding aged care for your spouse or parents and, trying to sift through all the DAPs, RADs, and working through the calculations for Centrelink, if you get totally overwhelmed then you are not alone. After going through this experience over the past few weeks I can tell you…don’t make any decisions or fill out forms till you’ve had a meeting with your financial advisor.

Here is a a great article using a case example.

At 69 years of age Evelyn Cronk should be looking forward to an active retirement in reasonable comfort. She bought her own unit 30 years ago and has almost three decades  of superannuation savings and a part pension to live off.

But with her husband Graham needing to go into residential aged care, Cronk finds herself in a financial predicament she finds daunting and unjust.

She married in later life and the house and other assets are in her name.

Even as a protected person – which means the unit will be an exempt asset for the purpose of calculating aged care fees because she is living in it – Cronk is looking at having to spend at least half her retirement nest egg to pay the refundable accommodation deposit (RAD) and other care costs.

“Centrelink assesses my superannuation as being owned by us both. It doesn’t allow for the fact that I will have half as much to draw down from to pay the same expenses I would have to pay if he wasn’t in care. I have to live as well,” says Cronk.

While Centrelink will reassess them as an “illness separated couple” and pay the age pension at a higher rate, the sums don’t add up, according to Cronk.

“In this case, two halves do not make a whole but rather, a large black hole for me to peer in to,” she says.

The costs of aged care

There are four possible costs associated with a move into residential aged care, two of which are based on a person’s income and assets.

Evelyn Cronk sees it as unjust that the government assesses her nest egg as belonging to both spouses for the purposes ...Evelyn Cronk sees it as unjust that the government assesses her nest egg as belonging to both spouses for the purposes of aged care. Photo: Pat Scala

While each care facility can set its own RAD for a room, many facilities also offer fully or partially supported rooms to those with assets below a certain level. RADs can range from $250,000 to $1 million.

Where a person has more than $162,087 in assets (outside of the family home if a protected person is living in it) they are required to pay the full RAD or its equivalent as a daily accommodation payment (DAP) or a combination of both.

The DAP is calculated using an interest rate set by the government, currently at 5.76 per cent (rising to 5.78 per cent on April 1). Depending on the facility, there may also be the option of paying a part RAD and drawing down on it to pay the DAP.

The government also determines the means-tested care fee, which can be anywhere up to $245 a day depending on a person’s income or assets.  This fee is currently capped at about $26,381 a year.

A basic daily care fee of $49.07 is paid by everyone irrespective of their means and is based on 85 per cent of the aged pension.

The final fee which can apply is additional or extra services charged by some facilities for services including newspaper delivery and menu choices of anywhere between $10 and $100 a day.

For the purposes of aged care, a protected person may be a spouse or dependent child who is to remain in the family home making it exempt in Centrelink’s calculations.

A protected person can also be a carer who receives an income support payment and has been living in the house for two years or more or a close relation who is eligible to receive income support and has lived in the house for five years  or more.

Affinity Aged Care Financial Services specialist adviser Donald Swanborough says a couple can typically hold under $325,174  in combined assets outside the family home before they are required to pay a RAD. This is providing one of them remain in the family home as a protected resident.

How they might pay a RAD without severely affecting the lifestyle of the person not in care will depend on their personal circumstances including their own expenses and whether they are entitled to the age pension, says Swanborough.

One of the benefits of paying the RAD is it may result in a higher age pension because the RAD is not counted for age pension purposes, he says.

However, the RAD does count towards the means-tested care fee.

One benefit may be that a couple separated by illness, such as when one moves into permanent care, receive the age pension at a higher rate than if they were a couple at home.

“If they are spending more than they are getting then it might mean budget cuts or a careful look at cash flow,” he says.

Cash flow

Cash flow considerations for the person in care will be the basic care fee, the means-tested fee, any extra service fee payable and additional expenses such as hair cuts or outings.

The person in the family home still has to meet expenses such as rates and utilities, food, transport, own medical expenses and general living.

Aged Care Steps technical manager Lara Hansen says that if paying the RAD in full isn’t feasible and there are only enough assets to fund a partial RAD payment, then they could also elect to deduct the DAP from the RAD paid.

“This removes the DAP from cashflow requirements by deducting from the RAD instead. This will result in slightly more aged care fees over time, as the DAP is calculated on the unpaid RAD. As the unpaid RAD decreases the DAP will increase,” says Hansen.

It also means a reduced lump sum payment back to the estate at the end, which in Cronk’s case would mean a reduced final retirement savings pool.

Another option could be to downsize the family home to help release some equity.

Hansen warns that this might affect age pension benefits.

Any surplus sale proceeds after paying the RAD and purchasing a smaller home will increase means-tested care fees, she says.

If the home is to be kept, other equity release options are a line of credit or a reverse mortgage to help fund any cashflow shortfalls. Aged care loans are also available and are specifically designed to pay the RAD. No repayments are made until the person leaves the facility.

Asking immediate family members to help fund any shortfall may be a further option, although it may require a loan agreement.

Periodic payments to help meet expenses is preferable to lending the money to pay a parent’s RAD, says Hansen.

Paying the RAD increases assessable assets and therefore increases means-tested care fees where  payments by family members is not considered assessable income when determining age pension and means-tested care fees, she says.

Thanks to Sydney Morning Herald and Bina Brown for this article.

Call-Brad-Lonergan-NowContact Brad Lonergan (Financial Planner) for more information about Aged Care Advice for Newcastle residents. 

BMK – Financial Advise Newcastle and Pension Planning Advice for Newcastle Residents.

Call 0423 621 120 or email brad@bmkfs.com.au

Bina Brown is a director of aged care placement company Third Age Matters.