Navigating Aged Care Finances: Maximising Your Inheritance and Pension November 16th, 2023

It's fair to say that many of us dream of being carted out of the family home, horizontal and in a box. While some can make that choice, for many of us, between now and when we shuffle off this mortal coil, there’s a good chance you’ll be spending time in an aged care facility.

The family home, perhaps bought decades ago, now holds most of the future inheritance likely to be distributed to those making the decision about the move to care. How that asset is dealt with could determine how much is left when the time comes to divvy up the proceeds.

A Quick Overview of Aged Care Finances

A quick and simplified overview on how the system operates for a single home-owner with a bit of money that’s about to enter an aged care facility. It gets even more complicated if a member of a couple stays at home, but the principles are the same.

Government Systems and Their Impact

An aged care resident has to wrestle with two separate government systems, each with a different set of rules. Some of the methods are shared by both systems, but they are used for different purposes.

Centrelink's Role in Financial Planning

The Centrelink system deals with Pensions. Age, Disability, and career payments are covered in Netplan Session 2.

Continuing to receive payments from Centrelink for as long as you can is important because that means the less that has to come out of your savings. If what you leave behind is important to you, the more that comes out now potentially reduces the inheritance passing to your loved ones.

Aged Care System and Accommodation Costs

The Aged Care system, on the other hand, deals with the accommodation and daily care costs of someone in residential aged care. The trick here is to keep your share of how much you have to pay on costs as low as possible while keeping your income up to ensure those costs are covered. Because this gets so complicated so quickly, we’ll only deal with the most significant issue, the accommodation costs.

Untangling Accommodation Costs

The accommodation is typically provided through the payment of a Refundable Accommodation Deposit or RAD. If paid in full, this comes back in full when the resident exits the home. That money is guaranteed by the Federal Government, meaning you don’t have to worry about the “Balmoral Home for the Bewildered” going broke on you.

Calculating RADs and DAPs

There’s normally no interest paid on the RAD, and in effect, it becomes an interest-free loan to the provider. The RAD amount is set by the facility itself and is usually linked to demand and the quality and amenities available. The maximum that can normally be charged is $550,000, and this usually gets you a room with an en-suite bathroom. A shared room and shared bathroom, on the other hand, might set you back $200,000. But be aware that the state of the market sometimes determines the RAD being asked for. RADs can vary, and I’ve seen rooms that at one point “cost” $550,000, now going for $450,000. Having a family haggler might be an advantage here!

Strategic Financial Planning

Very swanky places can charge up to $1.2 Million, and as you’ll see, paying that much for RAD actually has its benefits. If the agreed-to RAD is not fully funded, the shortfall amount is used to determine a supplementary Daily Accommodation Payment or DAP. The DAP is calculated by multiplying the outstanding RAD amount by a government fixed interest rate, which fixes the DAP payment for life.

While 2 years ago, the DAP rate was about 4 percent, it is currently 8.15 percent and is reviewed quarterly. Once you move, the DAP rate at the start stays with you as long as you remain in that facility. So someone who moved 2 years ago when it was 4 percent is still paying 4 percent.

Practical Example: Funding the RAD

Let’s, for example, take someone about to move to an aged care facility charging a RAD of $525,000 for the room they’ve chosen. If they have $425,000 in savings to put towards the RAD, there’s a $100,000 shortfall. With a shortfall of $100,000, the resident pays $100,000 X 8.15 percent or $8,150 a year. That calculated back to a Daily Accommodation Payment of $22.96 per day, which is typically paid monthly. The resident (or family) can choose to pay this or elect to have it slowly erode the RAD. Naturally, that reduces the amount ultimately refunded. It eats away at the RAD each month, and of course, each month the RAD reduces, it lifts the DAP the following month. The magic of compound interest suddenly becomes a curse!

Centrelink, Home Exemption, and Asset Assessment

Ideally, you fully fund the RAD, but that will depend on the overall cash flow. Under the Centrelink system, the home is ignored under the means testing system if it is still being lived in by someone that’s reliant on the house and has lived there for a period of time. In other words, you can’t move a grand-kid in and expect the exemption to continue forever. Under Centrelink rules, that exemption remains for 2 years after the person moves into care. It then becomes fully assessable under the asset test.

Maximizing Pension and Inheritance

If you can fund the RAD from other sources, you might find yourself in a position where your loved one can continue to receive a full or part pension because the money paid towards the RAD is also Centrelink means test exempt. If you rent the property out, that money will go a long way to paying for the daily care costs, particularly if it is supplemented by a part-age pension, which will be affected by the net rental income. You would then probably sell the place in 2 years, but at least you’ve held onto 2 years of pension.

If you sell the house now, all hell could break loose, or it could be a smart thing, depending on the value and other assets. If you’ve fully paid for the RAD, selling the house means an exempt asset now becomes a fully assessed asset when the proceeds are parked in the bank and captured by the means testing system. If all-up the total assets exceed $909,500, the non home-owning asset test for a single will mean the age pension is cancelled. That’s why sometimes, a place with a high means test exempt RAD can have its advantages.

Get the idea? A $1.2 Million RAD, for example, is a completely Centrelink exempt asset that ultimately comes back to the family. Sinking the money into a RAD could mean the Age pension keeps getting paid. If, however, the house sale funds the means test exempt RAD, the leftovers can be parked in an income-paying investment like a high-interest bank account, and that income can supplement the part or full age pension. And as you’ll know from Netplan Session 4, If the total remaining assets are less than $543,750, they should be getting close to a full age pension.