Funding Aged Care
Written by: Samantha Butcher l Advisory Team
Aged care in Australia can be a significant financial burden for families, especially if they are not prepared. The cost of aged care can vary depending on the level of care that is required as well as the location of the aged care facility. It is important for our clients to understand the different options that are available to fund aged care and also, to plan accordingly.
The decision of whether to enter into aged care is often highly complex and emotional. Sometimes the decision is made for you when the level of care you required cannot be practically provided in the home. Regardless, it is highly recommended you seek advice from a financial planner as early into the aged care process as possible to ensure all options relevant to you and your family are considered before decisions are made on the most appropriate strategy for you.
What Is The Level of Care Required?
The first step in funding aged care is to assess the level of care that is required. The Australian Government’s My Aged Care website provides information on the different types of care that is available, including home care as well as residential care. The cost of each type of care will vary, and it is important to understand the costs that are associated with each option.
For those who are able to remain in their own home, home care packages can be a cost-effective option. These packages provide assistance with daily tasks such as showering, meal preparation, and medication management. The cost of a home care package is determined by the client’s income and assets, and the package is means-tested.
For those requiring a higher level of care and cannot remain in their own home, residential care may be the best option. The cost of residential care is determined by the person’s income and assets, and it is also means-tested. The person who is entering the aged care facility may also be required to make a contribution towards the cost of their care.
The government has set limits on the amount of assets and income that a person can have and still be eligible for government-funded aged care. It is essential for those that are needing the care to review their current assets and income to be able to determine if they will be eligible for government-funded aged care and if they will be required to make a contribution towards the cost of their care.
Refundable Accommodation Deposit -VS- Daily Accommodation Payment
Residents that are entering into an aged care facility can be asked to pay a refundable accommodation deposit (RAD) or a daily accommodation payment (DAP) if they choose not to pay the RAD upfront. The RAD or DAP amount will vary depending on the type of accommodation and also the location of the aged care facility.
One of the biggest questions that we get from our clients is “how am I going to afford this? Do I have to sell my home?” There are a variety of ways to fund going into aged care and a few are listed below. However, firstly I would like to point out that an individual does not have to sell their family home if they do not want to. We have had clients believe that the government will force them to sell their home in order for them to pay the refundable accommodation deposit (RAD).
A RAD can be funded by using any of the following options, or a combination of many:
- Cash savings;
- Superannuation benefits. Individuals over age 60 and retired can access their superannuation tax-free;
- Proceeds of the sale of direct shares and/or managed funds. This will free up capital but will reduce the levels of future income for the individual;
- Gifting from other family members;
- Proceeds of the sale of the family home;
- Downsizing and using net proceeds of the sale and then subsequent purchase;
- Sale of an investment property; or
- Taking out a reverse mortgage. This is an extreme measure and would need very careful consideration to see if it was right for you!
Aged Care Factors to Take Into Consideration
The option considered most appropriate for the individual to fund their aged care needs will depend on many factors including but not limited to:
- Any capital gains tax consequences if selling investment assets;
- The need for a cash reserve once the resident is in aged care to fund their ongoing care needs;
- Estate planning considerations i.e. does the individual want to retain the family home to be passed down to the next generation?
- Is there someone still living in the home?
- If a family member gifts a lump sum to help pay the RAD, do they want this paid back upon the death of the individual? If so, this must be documented clearly in the Will as the RAD will be refunded to the Estate of the resident;
- It is important for individuals to understand that using the equity in a property to fund aged care can have significant implications for their Estate and should be carefully considered with the help of a financial planner; and
- The redemption of income-producing assets will eliminate future dividends, distributions and/or rent being received by the individual. This must be taken into consideration because the RAD is only one cost associated with aged care. The resident will have ongoing care costs including the basic daily care fee and potentially a means-tested fee and/or an additional services fee. Age pensioners will have the majority of their pension directed towards the basic daily care fee so a plan needs to be in place on how the other costs will be funded. A resident does not want to leave themselves without a future income stream or access to capital to help fund ongoing costs. One can choose to pay a portion of the RAD or none of the RAD. Any outstanding RAD balance will accrue interest at a rate determined by the government and interest is calculated and payable daily via the DAP.
Aged care residents who have a DAP, can make lump sum payments towards their outstanding RAD at a future date, thereby reducing the DAP payable going forward.
Aged care in Australia can be a significant financial burden for many families, and it is essential that you understand the different options that are available to fund aged care. Once the level of care required has been determined, it is important to seek clarification on the costs associated with each option, so the individual who is entering into the aged care facility and their family can make an informed decision about what is right, for them!
Canny Advisory + Your Aged Care Journey
Did you know that to be able to obtain financial advice on aged care, you need to speak to a financial adviser who has the ability to give you specialised advice?
This isn’t every financial adviser, however, it is when you choose to start your aged care journey with Canny Advisory. As mentioned before, the best possible time to get financial advice on aged care is as soon as possible. Having the time to not make rushed decisions, where possible, gives you the power to be able to make informed decisions for yourself and your loved ones.
Get in touch with our team today if you are looking at starting the aged care journey for yourself or a loved one.
