Charles Penheiro - Aged Care Financial Planner & Annuity Specialist

Aged Care Financial Planning




No Such Thing as a Deposit Fee

When a person enters residential age care they must pay a bond to enter which is otherwise known as a refundable accommodation deposit (RAD).

This is usually quite a large amount. Since the reforms of 1 July 2014 a person is able to pay the RAD as a lump sum, as daily payments or a combination of the two. If paid as daily amounts this is known as Daily Accommodation Payments (DAP).

If making daily payments the amount of the payment is calculated so that the resident pays interest only on the outstanding RAD not paid. The amount of interest is set by the government and is called the Maximum Permissible Interest Rate (MPIR). The current MPIR is 6.28% *)So if a resident's advertised RAD was $400,000 and they put down $200,000, they would have an outstanding RAD balance of $200,000.DAP's need to be paid on this and is calculated as:$200,000 x 6.28% = $12,560 pa or $31.41 per day.

The Age Care Act 1997 is quite clear that a person has 28 days once they enter a residential age care facility to decide how they wish to pay ie by RAD, DAP or a combination of the two.The resident should not be persuaded by the residential age care facility before entering care or 28 days after entering care in terms of how they wish to pay. Furthermore, if a resident chooses to pay by RAD, they have 6 months to do so.

A recent client was told by a residential age care facility that,  by law, she was required to pay a deposit fee of 20% of the RAD value before she could enter. In this case the RAD was $750,000. 20% equates to $150,000.On further questioning this with the facility it become apparent that this was not the law as such, but rather an internal policy.

As it turns out the client decided to go with a different room option and paid 20% of a much lower RAD figure which she was happy to do.

However, the aim of the reform in allowing residents to pay as daily payments was not to disadvantage those that were not capable of paying a large lump sum. So one must really question the ethics of a residential care facility that charges a fee that doesn't exist.

The above example is not uncommon. 

* Department of Health: Schedule of Fees and Charges for Residential and
  Home Care: July 2016.

Age care residents have rights!

A resident of aged care may have stage 3 Alzheimers. But they still have rights in residential care in spite of whether they know it or not.

These rights are acknowledged in the Aged Care Act 1997, Schedule 1 User Rights Principles 2014.  There are 21 rights listed with just a few listed below:

. To be treated and accepted as an individual, and to have his or her individual preferences taken into account and treated with respect.

. To be treated with dignity and respect, and to live without exploitation, abuse or neglect.

.To live without discrimination or victimisation, and without being obliged to feel grateful to those providing his or her care and accommodation.

In many cases a child of a resident in aged care will need to be an advocate for the resident if there is any suspicion that the residents rights are being abused. 

The Aged Care Complaints Commissioner is a dispute resolution service which is able to help mediate any such complaints on your behalf.

Just as an example, a client of mine had both his parents in residential care in the same facility with a shared room so they could stay together.

When the father passed away the mother was on her own in the double room and as you would expect the care facility wanted the room back so they could market it to another couple.

The problem was that there was no single rooms available at the time for the mother to go into. So they all had to wait.

However the residential care facility then suggested that the mother share the room with a new single resident, contrary to the wording of the aged care agreement.

This is just one example where the Aged Care Complaints Commissioner's services may have been needed.

The son made enquires to the Aged Care Complaints Commissioner in regards to this situation and based on the advice he was given, was able to defend his mums position in not giving up her double room until a single room was available.

More Means Tested Care Fees for Aged care Residents

Age Care fees are means tested. The more assets and income you have, the more you pay.

Assets and income are combined to determine an overall means tested care fee on a daily basis. The maximum means tested care fee is currently $69.94* per day or $25,528.71 per annum.

The means tested care fee is on top of the Basic Daily Care fee which s a standard fee all residents must pay of $47.49 per day* or or $17,333.85 per annum (85% of the maximum Centrelink Age Pension).

If the family home is rented out to help pay for such fees, then currently $157,051.20 of the family home is counted as an asset for age care purposes.

Currently, the rental income is not counted as income for age care purposes.

However the federal budget has earmarked changes to this. It is proposed that from 1 January 2016, rental income will be counted.

In the absence of people going into age care prior to 1 January 2016 alternative solutions may need to be examined to reduce the means tested care fee. These may include utilising annuities, Investing in Insurance Bonds in a family trust, Gifting, establishing a funeral bond/ plan or establishing a private loan structure via a line of credit on the residential property.

* Department of Health: Schedule of Fees and Charges for Residential and
  Home Care: July 2016.

To RAD or to DAP? That is to be the Question.

Before 1 July 2014 the accommodation bond was the only accommodation charge. As the name suggests it is a bond you put down to gain entry and which you later receive when you exit the care facility. At the point of death the bond is refunded to the estate.
 
The accommodation bond and its new term, refundable accommodation deposit (RAD) is 100% guaranteed by the government. Hence if the residential age care facility were to go bankrupt, the government would step in and refund the RAD back to residents.
 
The problem is that accommodation bonds or RAD’s as they are now know can be very expensive. The maximum that a residential age care facility can charge for a RAD is $550,000 * without government approval. Anything greater than this and the facility needs to get approval from the government.
 
As you can imagine the nicer the facility, the nicer (higher) the RAD.
 
However it must be remembered that this is not an indication of the standard of care as all age care facilities must adhere to a standard level of care approved by the government. If they do not adhere to this standard of care then they lose their accreditation. If they lose this then they are no longer able to claim subsidies from the government which forms a large part of their funding and hence revenue.
 
I have observed recently that facilities charging a RAD from around $200,000 to $250,000 are shared rooms. While RAD’s above this will get you a single room with a shared bathroom or ensuite.
 
Whichever way you look at it, these are large figures. Which is why from 1 July 2014 the government said that a person is able to pay a RAD as all or part of a Daily Accommodation Payment (DAP).
 
The difference between the RAD and what you pay towards the RAD is effectively an interest only loan which you do not pay back. The Maximum Permissible Interest rate on this loan is currently 6.75% which is set by the government.
 
So if a RAD is say $500,000 and you choose to pay 50% of this ($250,000) and pay the rest as the DAP, the DAP will be $16,875 pa or $46.23 per day ($250,000 x 6.75%).
 
This provides a bit more flexibility in people having greater choice as to where they go if they do not have a large upfront lumpsum, but have the means to pay an ongoing charge.
 
Unlike the RAD however, the DAP is not refundable.
 
Importantly, a residential care facility must advertise the amount of RAD and equivalent DAP so there is transparency. Also, the resident has up to 21 days to decide how to pay the RAD/ DAP. Consequently the facility cannot discriminate between those paying a lumpsum or an ongoing fee or a combination of the two.
 
* Department of Health: Schedule of Fees and Charges for Residential and
  Home Care: July 2016.

 I Say old Chap, thats a huge MPIR!

As discussed in a previous post, under new legislation from 1 July 2014, a resident entering care does not need to pay for the full amount of any Refundable Accommodation Deposit (RAD).
 
Instead, the resident if able, has the ability to make daily payments rather than make one large lumpsum. These daily payments are called Daily Accommodation Payments (DAPS).
 
The amount of any RAD not paid is seen as a non-refundable interest free loan. For example, a facility asks for a RAD of $500,000. A resident puts down $300,000 and $200,000 is outstanding. The facility then charges interest on this outstanding amount based on a maximum rate set by the government. Currently 6.75%*. This interest rate is called the Maximum Permissible Interest Rate (MPIR).
 
So in the above example, the daily payment on the outstanding amount of $200,000 becomes $13,500 per annum ($200,000 x 6.75%) or $36.96 per day.
 
As the name suggests it is the maximum that a residential age care facility can charge. However I have yet to see a facility charge anything lower than the MPIR.
 
However, a client of mine recently took out a loan secured against their property to pay for 98% of their RAD payment. The interest rate charged by the bank was 3.75%.
 
That’s a HUGE difference in interest charges.

* Department of Health: Schedule of Fees and Charges for Residential and
  Home Care: July 2016.

No Income no assets. Who will look after me when I am old?

In many of my previous posts you will have picked up that age care is not cheap. So what happens to those who cannot afford it?

Thankfully, we still live in a country that looks after those less fortunate. While it is true that money will give you more options, you still have access to Age Care if you have minimal income and assets.

The first phase to be offered will be home care. This usually works reasonably well as people in later life will generally prefer to stay in the home they live in and are familiar with. This is also a win for the government as providing home care options is more cost effective for the government than residential care.

Residential care facilities are required to provide a certain number of beds called concessional beds. These are for residents who are fully or partly supported by the government.

I have found it hard to get exact numbers on this, however speaking to a number of social workers the general consensus is that around 2 – 5 beds out of 100 will be beds that are fully concessional beds. In broad terms, this will be for those residents who are generally on a full Centrelink Age Pension.

In this instance the resident will not pay a means tested care fee or be required to pay a Refundable Accommodation Deposit (RAD). They will be required to pay the Basic Daily Care fee of $47.49 per day* which works out to be 85% of the Centrelink Age Pension. Generally, this will come directly out of the resident’s age pension.

With so few beds in each facility the issue becomes that of location. If your not worried about location, then according to the social workers I have spoken to, you will not have any problem finding a bed relatively quickly. Such a location may be for example on the outskirts of the city. However if you wish for something more central, then you might have to wait a little longer.

The other issue is that you may find yourself having to share a room. This is not ideal. Although for some residents it works out well in terms of having some company.
 
* Department of Health: Schedule of Fees and Charges for Residential and
  Home Care: July 2016.
 
Age care and annuities
 
Annuities are a financial products that provide security of income.
 
You go to an insurance company and say you would like to purchase an annuity with X amount of dollars.
 
The insurance company then give you a quote and say that given the value of capital you are willing to invest, they will pay you an income of $XX.XX for the rest of your life.
 
The benefit of such a product is that your income is guaranteed in spite of movements in financial markets.
 
Annuities work on statistics. A person who specialises in statistics related to finance is called an Actuary. They look at the funds you have to invest, age, life expectancy, health condition etc and determine how much they are willing to pay you.
 
It many ways it is like taking a bet. If you live beyond your life expectancy, then the insurance company has to continue paying you. However if you do not live beyond your life expectancy, then the insurance company no longer has to pay.
 
The above is a very basic understanding of annuities.
 
So how does it help for age care purposes? Via a principle called the deductible amount.
 
Say you have invested $200,000 into an annuity and you are 80 years of age receiving $9,000 pa from the annuity.
 
An 80 year old male has a life expectancy of 8.6*years.
 
$200,000 ÷ 8.6 = $23,256. This $23,256 is known as the deductible amount.
 
For age care and Centrelink purposes the income from the annuity is seen as:
 
The income from the annuity ($9,000) – the deductible amount ($23,256).
 
So in the above example this means that income = $0.00.
 
For Centrelink purposes there is no income from the annuity so this may increase any Centrelink benefit.
 
For age care purposes there is no income to declare from the annuity in regards to determining the means tested care fee (MTCF) which means the MTCF may reduce.
 
The other interesting thing about the deductible is that it is used to depreciate the value of the initial capital invested.
 
So in year two the value of the annuity asset will be $200,000 - $23,256 = $176,744.
 
Having a depreciating asset each year that reduces by the value of the deductible, may help to increase benefits under the Centerlink assets test.
 
Likewise, each year a smaller amount of the value of the annuity will be recorded as an asset in order to determine the means tested care fee and reduce the amount of this fee for age care purposes.

* ABS Life Tables 1 January 2015