CPD: Retirement – the move to residential aged care

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Understanding Australia’s residential aged care system is imperative to better support your clients.

Not all older Australians need residential aged care; however, for those that do need to access it, the process is complex and the costs significant. This article, proudly sponsored by Russell Investments, explores these issues.

Retirement is often divided into three clear stages. Although the nomenclature can vary, each segment is consistently described.

The first is early retirement, that time when the retirement bucket list is front and centre. It’s that stage when retirees hook up the caravan and take to the open road with other grey nomads. Some prefer travel further afield, while for others, fulfilling retirement goals closer to home is more important. Expenditure is generally reasonably high during this stage.

The second stage sees retirees slow down. Perhaps they still travel, but less independently. During this time, most retirees remain in their own home, often with the support of in-home care (read our article from last month). Expenditure tends to slow during this stage; depending on needs, a greater proportion tends to be directed to medical and care expenditure.

Not all retirees move into the third stage; many remain relatively independent throughout their retirement years. However, those who do need a higher level of care generally enter residential aged care.

This third stage may pertain to a client, or a client’s parent/s. The process is complex and the costs not insignificant. Being able to break down these complexities for your clients can be valuable. This third stage of retirement can be the most expensive but is often the least planned for. Whether the prospective resident is your client or a client’s parent, being able to help your client navigate the cost structures and determine how best to fund residential aged care is an important service.

Like many government programs, residential aged care is subject to change and is expected to do so under the new government. The final report of the Royal Commission into Aged Care Quality and Safety was handed down in March 2021 and its findings are, largely, still to be implemented. In addition, the Australian government is partway through a five-year, $18.8 billion aged care reform program, which includes the new Australian National Aged Care Classification (AN-ACC), which is slated to deliver[1]:

  • a care funding model that better matches funding to resident needs
  • more equitable distribution of funding
  • independent assessments of resident’s needs for funding purposes, freeing nurses from undertaking paperwork
  • a new methodology for annual changes in prices/indexation, informed by independent costing studies and advice
  • an equitable model for distributing funding uplifts from 1 October 2022, including the Basic Daily Fee supplement, care minutes funding and increased residential respite funding.

Residential aged care – the basics

Residential aged care is designed for older people who can no longer live independently at home, even with some support. These people generally need ongoing help with everyday tasks or health care.

When entering aged care, the resident can expect to be provided with:

  • a furnished private room, although most facilities allow the resident to bring small pieces of furniture with them
  • services to meet day-to-day needs: meals, laundry and social activities, as well as cleaning, heating and cooling, and maintenance of the grounds and buildings.
  • personal care help: bathing, eating, help with taking medications and health treatments as required.
  • clinical care – this may include nursing and allied health services such as speech therapy, podiatry or physiotherapy.

Many aged care homes in Australia are subsidised by the federal government. To be eligible for government funding, subsidised aged care homes have to meet Aged Care Quality Standards to ensure quality care and services are provided.

These subsidies are paid directly to the aged care home and is based on:

  • an assessment of your client’s care needs by the home (using the AN-ACC)
  • how much your client can afford to contribute to the cost of care and accommodation (using a means assessment).

Importantly, affordable care and support services can be accessed by those who need it.

There are other forms of retirement accommodation not funded by the federal government, typically those billed as retirement villages or independent living units. These accommodation services don’t necessarily provide care services, although residents can access government funded in-home care assistance. These are regulated by state and territory governments.

The costs of aged care

Funding residential aged care can be daunting. There are several layers of costs, many of which are described by acronyms, and six-to-seven figure sums are often quoted. While there are places set aside for those with no assets and little income, it’s expected that most people will be self-funded, on top of government subsidies received by the aged care facilities.

The fees charged and types of costs incurred depend on the chosen facility and a means assessment of your client’s income and assets.

Income and assets assessed

The first step in the process is to complete a means assessment. While not mandatory, if it’s not completed the client may be required to pay the maximum means tested care fee until the annual and lifetime caps are reached, as well as paying the agreed room price.

The income assessed to determine costs includes, but is not limited to[2]:

  • income support payments such as the Age Pension
  • deemed income from financial investments
  • net income from rental property
  • war widow or widower pensions and some disability pensions
  • net income from businesses, including farms
  • superannuation and overseas pensions
  • income from income stream products such as annuities and allocated pensions
  • family trust distributions or dividends from private company shares
  • deemed income from excess gifting.

All of an individual’s assets are considered, as follow:

  • financial investments, including (but not limited to):
    • bank, building society, and credit union accounts
    • cash
    • term deposits
    • cheque accounts
    • friendly society bonds
    • managed investments
    • listed securities
    • loans and debentures
    • shares in unlisted public companies
    • gold and other bullion.
  • other assets include (but are not limited to):
    • household contents and personal effects (these are typically valued at $10,000)
    • foreign assets including investments, business interests, and real estate
    • investment property
    • special collections such as stamps, coins or art works
    • superannuation balances
    • private trusts, family trusts and private companies
    • refundable deposits paid for accommodation in an aged care home.

What’s different about this assets test is that part of the value of the client’s family home may be counted in their assets assessment. If the family home is retained, a capped amount of $178,839.20 (at 20 March 2022) or the net market value of the home (if lower) is included in the assets assessment.

If the client is part of a couple, each partner is considered to own half of the home; therefore, half of the net market value or the capped value is included as an asset – whichever is lower. The cap is applied to each half of the home.

Please note: the home won’t be counted as an asset if it is occupied by a protected person, which is one of:

  • a partner or dependent child
  • a carer eligible for an Australian Government income support payment, who has been living in the home with your client for at least two years
  • a close relative who is eligible for an Australian Government income support payment, who has been living in the home with your client for at least five years.

Fees and charges

The different types of costs in residential aged care are[3]:

Basic daily fee: A flat fee paid by all residents to cover the daily living expenses, such as cost of meals, room cleaning and laundry. It also goes towards paying utility charges – heating and cooling, power and water.

The daily fee is currently $54.69. For those receiving the Age Pension, the daily fee is 85 percent of the single pension and typically rises twice each year when the pension is indexed (March and September).

Means-tested care fee: A contribution that some people pay toward the cost of their care, determined by a means assessment. The most your client will have to pay is $29,399.40 per year; this is an annual cap set by the government and once reached, nothing more needs to be paid in that year.

There is also a lifetime cap that applies to the means-tested care fee. Once your client reaches this cap, they cannot be asked to pay any more in means-tested care fees. The lifetime cap is currently $70,558.66.

Annual and lifetime caps are indexed on 20 March and 20 September each year.

Accommodation fee: This covers the cost of accommodation in the aged care residence and its maintenance. The fee is set by the aged care facility and not the government, so each provider will charge differently. The amount paid will depend on the client’s means assessment. Income and asset amounts change with indexation on 20 March and 20 September every year and are up to date as at 20 March 2022.

If your client has:

  • income below $28,974.40 and assets below $52,500, the Australian government will pay their accommodation costs
  • income above $73,193.12 or assets above $178,839.20, the client needs to pay the full cost of their accommodation.

The higher their income and assets, the higher the fee they need to pay. Your client has a choice about how to pay this fee – as a Refundable Accommodation Deposit (RAD) or a Daily Accommodation Payment (DAP) – more on that shortly.

The following fees, unlike care and accommodation costs, are not set by the government – the full cost must be paid by the resident.

Additional service fees: Fees for services beyond the minimum care and service requirements; such fees may cover pay TV or streaming services, or access to the internet.

Extra service fees: Some residential aged care facilities homes offer an extensive range of extras that incur additional costs, such as a hairdresser or beauty services, a glass of wine with dinner or regular outings.

The refundable accommodation deposit (RAD)

The RAD is one aspect of aged care costing that attracts a lot of attention, not least because large sums of money are involved. In Sydney, for example, it’s not uncommon for popular aged care facilities to command RADs upwards of a million dollars.

As outlined above, a RAD is one way to pay the accommodation fee and varies between different aged care residences. As the name implies, when your client leaves the facility, the deposit is fully refundable. In essence, it’s a form of loan made to the facility by your client, one that’s repaid when your client leaves.

Clients with assets over $52,500 need to pay an accommodation fee of some sort; those with assets valued over $178,839.20 are required to make a full accommodation payment.

The RAD and the family home

It’s important to note that the client’s home is considered to be part of their overall assets unless an immediate family member or carer had been living with them at the time they moved into care and are still living there. If the home is empty, the client’s total assets will most likely exceed $178,839.20 and they will need to make a full accommodation payment. Quite often an important financial decision will need to be made with respect to the sale of the family home to fund the aged care place.

Refundable

If your client decides to return home or move to another facility, the RAD must be refunded within 14 days. In the event your client passes away, the RAD must be refunded to the estate within 14 days of receiving a certified copy of the Grant of Probate.

Daily accommodation payment (DAP)

If a client doesn’t have access to the funds to pay a RAD, the alternative is the DAP, a daily fee that is calculated against the overall accommodation fee your client needs to pay. The cost is calculated daily and charged monthly. It includes an interest component, calculated at a rate set by the government.

The following calculation is used to determine the DAP.

DAP = (RAD × MPIR) / 365

The DAP is calculated by multiplying the full accommodation cost (RAD amount) by the current interest rate, and then divide that figure by 365 to determine the daily amount.[4]

The importance of aged care advice

Whether you’re helping a client, or a client’s ageing parent, the move to aged care is complex on both an emotional and a financial level. By removing the financial complexities, a major stress element is eliminated and your client is better placed to make an informed decision about meeting their aged care needs.

As their adviser, you can help explain the costs and, together with your client, determine the aged care funding model that works best for your client’s individual circumstances. Your experience helping the client achieve their financial goals, meeting their wealth management and estate planning needs, the relationship you have built with them – these factors all combine to put you in prime position to help them navigate this last stage of life.

 

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References:
[1] https://www.health.gov.au/health-topics/aged-care/aged-care-reforms-and-reviews/residential-aged-care-funding-reform
[2] https://www.myagedcare.gov.au/understanding-costs
[3] https://www.myagedcare.gov.au/aged-care-home-costs-and-fees#fees-i-pay
[4] https://www.health.gov.au/sites/default/files/documents/2022/06/base-interest-rate-bir-and-maximum-permissible-interest-rate-mpir-for-residential-aged-care-bir-and-mpir-for-residential-aged-care_0.pdf

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