‘Unaffordable’: Why aged care costs are about to skyrocket

Australians in or facing retirement are in for a nasty surprise when it comes to the new cost of aged care being rolled out from July 1.

Beyond the basic daily fee of $64 per day, how much you will pay towards your accommodation and services is based on your assets and income. But the new means test set to be introduced this year might leave you paying more than you can afford.

Let’s start with what your accommodation could cost.

Australians in or facing retirement are in for a nasty surprise when it comes to the new cost of aged care being rolled out from July 1.Credit: Fairfax

The market price cap for aged care beds is $750,000. Only beds priced above that amount require government approval. This cap has the effect of making many prices sit at or close to the limit.

To work out if you need to pay the market price, the means test uses an asset cap of $206,663, and once your assets are over that amount, you need to pay the market price.

Any amount you don’t pay as a lump sum is charged as a daily payment. The government sets the rate for daily payments – currently it’s 8.17 per cent – per annum. From July 1, your lump sum will attract an exit fee of 2 per cent a year (capped at 10 per cent) and the daily payment will be indexed twice a year in line with CPI.

Don’t be fooled by the fact that aged care is means-tested - you can be charged more than you can afford to pay.

Once your assets reach $238,000, you will pay a hotelling supplement at 7.8 per cent. Under the income test, you will pay 50¢ per dollar once your income exceeds $95,400 a year. The hotelling supplement covers items such as meals, utilities and cleaning and is capped at $5694 a year.

Let’s say you are a pensioner with $320,000 of assets and the price for your bed is $750,000. You could pay $250,000 by lump sum, leaving $40,850 per year (indexed) as an accommodation payment.

You will pay $23,294 a year basic daily fee and $5694 as a hotelling supplement. Before you have paid for any extras such as a glass of wine, hairdressing or Netflix, your aged care is $70,000 a year.

Your yearly pension income of $29,400 and $15,000 of interest will leave you with a cash flow deficit of more than $25,000 a year. And then there’s the $5000 a year exit fee from your lump sum when you leave (capped at $25,000).

For those with assets above $502,981 or income above $131,279, there’s a non-clinical care contribution on top. It is calculated based on 7.8 per cent of assets and 50¢ per dollar of income above the thresholds. There is a daily cap of $101 per day and lifetime cap of $130,000 or four years, after which you stop paying this fee.

Using the scenario above for a self-funded retiree with $1 million of assets and $50,000 a year of income, the cost will be $70,000 plus a non-clinical care contribution of $32,923 a year, taking the cost, before any extras, over $100,000 a year.

Don’t be fooled by the fact that aged care is means-tested – you can be charged more than you can afford to pay. Make sure you crunch the numbers, or get someone who knows how to do it for you, so you can avoid a nasty surprise.

Rachel Lane is the author of Downsizing Made Simple, a book and website aimed at demystifying downsizing.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

Expert tips on how to save, invest and make the most of your money delivered to your inbox every Sunday. Sign up for our Real Money newsletter.