The move to an aged care home is often an emotional and stressful one. This is where appropriate advice can give clients the confidence and peace of mind that the right decisions are being made.
One of the key financial concerns with the move to an aged care home is often around having enough cashflow to fund costs but there are fundamental strategies advisers can use with their clients to maximise cashflow.
STRATEGY ONE: PAY A REFUNDABLE ACCOMMODATION DEPOSIT (RAD)
In many cases, the largest cost with moving into an aged care home is the accommodation payment, frequently requiring the sale of assets including the family home.
Although there are mechanisms in place for those with little means to have their accommodation subsidised by the Government, there are many who will need to pay the accommodation payment published by their chosen aged care home (or a lower amount agreed with the home).
The resident has a number of options to pay their accommodation payment amount. They can pay the amount as:
- A refundable lump sum (known as a RAD);
- Ongoing payments (known as Daily Accommodation Payments or DAPs); or
- Combination of both.
Where there are sufficient assets to do so, choosing to pay the accommodation payment in part, or in full, as a RAD can provide significant cashflow benefits. This is due to three main reasons:
- Payment of a RAD will reduce the amount of ongoing payments the resident will need to pay. Ongoing payments are simply interest on the amount of the accommodation payment that is not paid as a lump sum. The interest rate (known as the Maximum Permissible Interest Rate or MPIR) for ongoing payments is set by the Government and is currently 4.91% . Unless alternative investments can provide a better low risk return than the resident’s MPIR, choosing to pay a RAD compared to DAPs can improve a resident’s cashflow significantly.
- Payment of a RAD provides the resident with the option to have their DAPs on any outstanding accommodation payment (where a part RAD is paid) and other aged care fees deducted from the balance of their RAD. This can reduce pressure on their cashflows. However, it is important to note that while the law requires aged care homes to deduct DAPs from a resident’s RAD (where it is requested by the resident in writing), the law does not require them to do so with other fees. i.e. payment of other aged care fees, such as the basic daily care fee and means-tested care fee, from RADs is at the aged care home’s discretion.
- RADs are exempt from the Centrelink/DVA pension assets and income tests. This can help reduce assessable assets and income and increase a resident’s Age Pension entitlements, improving their cashflow. From an aged care means testing perspective, while RADs are assessed as an asset, there is no income assessment which can help reduce the means-tested care fee.
CASE STUDY: BARRY
Barry aged 87, single, has recently entered an aged care home with an agreed accommodation payment of $400,000. He has $300,000 in cash and term deposits and has retained his former principal home worth $600,000 so that his son, Tom, can continue to live there rent-free. Tom is receiving the Disability Support Pension from Centrelink due to a disability since birth and has lived there for over 20 years.
Table 1 compares Barry’s cashflow outcomes if he:
- Pays all of his accommodation payment as DAPs;
- Pays $250,000 as a part RAD with $150,000 outstanding paid as DAPs; and
- Pays $250,000 as a part RAD with DAPs on the $150,000 outstanding deducted from his part RAD.
By paying a part RAD of $250,000 compared to paying all his accommodation as DAPs, Barry has increased his net cashflow by $11,676 in the first year. The reduced interest income from his term deposits was more than offset by the increase in his Age Pension and reduction in his ongoing DAPs. Barry can further improve his cashflow by having his remaining DAPs deducted from the part RAD.
STRATEGY TWO: RENT THE FORMER HOME
Alternatively, renting the home can help to increase cashflow.
Whilst renting the home can improve cashflow outcomes for residents, there are some important considerations that they need to be mindful of:
- Net rent income will be assessed under both the Centrelink/DVA income test and the aged care means test. This will likely reduce Centrelink/DVA pension entitlements and increase aged care fees (means-tested care fee), reducing the overall cashflow benefits from receiving rent income.
- After two years, the former home will generally be assessed as an asset under the Centrelink/DVA pension assets test and can further impact pension entitlements;
- There may be significant refurbishments required before the home can be rented out;
- Potential periods during the year that the property may not be rented out;
- Rent income can increase the resident’s taxable income above relevant tax-free thresholds and require them to lodge annual tax returns; and
- Land tax may become payable.
CASE STUDY: PAM
Pam, aged 87 and widowed, has recently entered an aged care home with an agreed accommodation payment of $400,000. Pam and her family want to retain the former home of over 30 years that is now worth $1,000,000. Pam also has $100,000 in the bank.
Table 2 compares Pam’s cashflow outcomes if she:
- Pays all her accommodation payment as DAPs, retaining a cash reserve of $100,000 and does not rent out the former home; and
- Pays all her accommodation payment as DAPs, retaining a cash reserve of $100,000 and rents out the former home and receives $600 per week net rent.
If Pam rents out her former home, her net cashflow position in the first year improves by $6,296. This is despite her having a tax liability from higher taxable income, a reduction in her Age Pension entitlement and a higher means-tested care fee.
STRATEGY THREE: CHOOSE A HIGHER PRICED ACCOMMODATION
Whilst it is not possible under current rules to negotiate a payment of a RAD amount higher than that published by the aged care home, clients can choose an accommodation arrangement with a higher published price (where available).
Where a client has the choice, their overall cashflow position can improve by choosing the higher priced accommodation. This is because the reduction in assessable assets and income (for Centrelink/DVA pension purposes) from the payment of a higher RAD can result in an increased Age Pension entitlement, above that of any income that could be earned from the investment of those funds.
In these cases, the client can experience higher overall cashflow as well as benefiting from what could be better accommodation.
Ideally this strategy can be considered where a decision to sell the former home has been made prior to entering an aged care home.
STRATEGY FOUR: INVEST IN AN AGED CARE ANNUITY
Aged care residents can also maximise their cashflow using certain investments such as an aged care annuity.
In addition to providing a competitive income rate compared to investments in cash and term deposits, an aged care annuity may help increase a resident’s cashflow by potentially increasing their Age Pension entitlement and reducing their aged care fees. This is because part of the investment into the aged care annuity is not assessed under the Centrelink/DVA pension assets test and aged care means test and part of the income received is also not assessed.
Minh Ly is technical services manager at Challenger.