Lump sum or daily fee? Elderly face a big decision on aged care

Individuals can’t wait for Aged Care reforms, key financial decisions often have to be made quickly — here’s how to decide how to pay.

It is important to remember that aged care is typically short term, generally less than two or three years.

The aged-care sector continues to be in the spotlight despite a royal commission and moves to improve the sector’s finances in the budget. But for those who are entering aged care — and tens of thousands of Australians will continue to do so — big decisions simply must be made long before industry-wide solutions arrive. 

One key decision is whether to pay a lump-sum upfront, known as a Refundable Accommodation Deposit (RAD, formerly known as a bond) or pay a daily fee known as the Daily Accommodation Payment (DAP).

Another option is to part-pay the RAD and pay a reduced DAP. The RAD is a government-guaranteed lump-sum payment for a bed and can range from as low as $200,000 to more than $2m. The RAD is refunded when the resident dies or leaves the facility. 

It is important to remember that aged care is typically short term, generally less than two or three years. The key question to answer is: is it worth going down the path of selling things to finance a RAD? 

People with assessable assets of less than $171,535.20 cannot be asked to pay a RAD. 

The interest rate used to calculate the DAP is set by the government based upon the movement in the 90-day Bank Accepted Bill rate and is reviewed every three months.

On 1 July this year, it was lowered to 4.1 per cent per annum – the lowest ever. Given where interest rates are heading, it may be reduced even further in the next review in three weeks. 

The decision whether to pay a RAD or a DAP — or a combination of both — will depend on the new resident’s financial situation. Here are some examples: 

If a resident has $300,000 in the bank earning less than 1 per cent, those funds clearly should be used to pay a RAD. Foregoing interest of 1 per cent to avoid paying at a rate of 4.1 per cent is an easy decision to make. (For those who entered aged care before the recent rate cut, the DAP rate was closer to 5 per cent).

For a resident who has a family home they wish to keep, and they have sufficient income and savings, they may prefer to pay a DAP, which would allow them to keep the family home.

If a resident has a share portfolio or other financial investments that generate an annual income of 5 per cent or more, they may prefer to keep those investments and pay a DAP instead, avoiding any potential capital gains tax from disposing of the investments.

If a resident’s income provides sufficient cashflow to cover the various aged care fees, then DAPs are often better (for instance, they may have a healthy defined benefit superannuation pension if they had a long career with one employer). 

Residents can change their minds as time passes. If the resident has not paid the full RAD upfront and decides they would like to pay more, they can top it up at any time and the DAP will be adjusted downwards. Conversely, if they have paid a RAD and cashflow gets tight, they can elect to have some or all of the monthly fees deducted from the lump sum.

What do aged-care facilities prefer — RADs or DAPs?

Facilities are limited to what they can do with funds from RADs and may be faced with investing those funds at the current bank rate — around 1 per cent.

Owners of small aged-care facilities that have already done up their rooms may prefer the greater cash flow that derive from DAPs, which they get to keep.

Owners that wish to build or expand their facilities, or buy land on which to build, will more likely prefer residents to pay RADs, which represent a form of lump-sum cheap finance, certainly cheaper than a bank loan. 

John Rawling is an aged-care expert with Joseph Palmer and Sons