Self-funded retirees facing higher cost for aged care

Wealthier Australians are likely to face higher out-of-pocket costs for aged care, but to what extent and who is affected depends on a few key factors.

Federal Labor reportedly wants to increase the lifetime contributions cap for residential care from $79,942 to $190,000.

If you know what a basic daily fee is, chances are you have helped an elderly family member transition into a retirement village – and as part of the process learned all about the world of aged-care accommodation.

The rest of us are oblivious to the difference between a DAP and a RAD, and it is all a bit of a mystery. We know we may have to deal with the complexities of senior care in the future but, until then, most of us do not pay too much attention to it.

There has been a lot of noise this week regarding aged-care fees and the likelihood they will increase; but to what extent and who is affected?

Federal Labor reportedly wants to increase the lifetime contributions cap for residential care from $79,942 to $190,000, whereas the Coalition wants the cap to be much lower than $190,000. To understand what this actually means, we need to unpack how aged-care fees work.

As The Australian has reported, “some self-funded retirees entering a nursing home after July next year face an average of $40,000 extra coming out of their own pocket’’ if the new recommendations are fully adopted.

Given the choice, most of us would prefer to stay in the comfort of our own home as opposed to moving into an aged-care facility. To prolong living independently, we can go through an aged-care assessment process to see what level of government-funded homecare package is provided.

Support can be in the form of social workers, carers and nurses who visit on a regular basis, depending on need and financial eligibility. Privately funded homecare services can also be engaged if the government package is not enough, but this can be expensive and eat into retirement savings.

When it gets to a point where it is no longer feasible to live in the family home, then an aged-care facility is the usual pathway. And just like the property market, the more desirable the location, the higher the cost. A lump sum refundable accommodation deposit (RAD), formally known as an accommodation bond, is usually requested by the aged-care provider to secure a room.

Although there is no upper limit on how much an aged-care provider can request for a RAD, if it is above $550,000 they must get approval from the Aged Care Pricing Commissioner.

Federal Minister for Health and Aged Care Mark Butler. Picture: Martin Ollman

Most retirees will sell the family home to pay the RAD but, those who choose not to can elect to pay a daily fee called a daily accommodation payment (DAP).

The amount of the DAP is effectively 8.36 per cent per annum interest on the lump-sum RAD that was not paid. For aged pensioners who cannot afford either the RAD or the DAP, the federal government steps in and pays the aged-care provider an ‘‘accommodation supplement’’ of up to $68.14 per day.

Once you have secured a room in the aged-care facility, multiple ongoing fees commence.

Rodney Horin of Joseph Palmer and Sons.

Joseph Palmer and Sons licensed financial and aged-care adviser Rodney Horin says: “Each resident will receive an invoice every month with up to four line items – the daily care fee, extra services fee, the daily accommodation payment if a lump sum was not paid, and finally a means-tested fee.”

The basic daily care fee is set at 85 per cent of the single aged pension rate and is paid by all aged-care residents regardless of their financial situation, to contribute towards day-to-day services. It is currently $61.96 per day.

Some facilities provide the option of extra services which can cost anywhere from $20 to $100 per day. They give the resident access to a bigger room, better food, upgraded housekeeping and laundry services, exclusive events and greater specialised health services.

With the means-tested fee, the government pays the aged-care facility a daily subsidy depending on the resident’s level of care needs, which typically varies from $100 to more than $400 per day. However, if you are assessed as being financially capable of contributing towards this cost, a means tested fee will apply.

Although there is no cap on the daily means-tested fee, there is an annual cap of $33,309 and a lifetime cap of $79,942. In other words, if the maximum daily means tested fee is applied, after 2.4 years the means tested fee would stop forever as the lifetime cap would have been reached.

And this is where the Labor Party wishes to make a change, by increasing the lifetime cap from $79,942 to $190,000. This means someone paying the maximum daily means-tested fee would have to pay it for 5.7 years rather than the current 2.4 year period.

Horin says: “I have empathy for aged-care providers and feel the wealthy should pay more for aged care. With the cost-of-living crisis, the cost to deliver aged care has increased and margins are being squeezed.”

With the significant strain on the aged-care sector, projections of resident numbers going from 200,000 to 750,000 over the next 40 years indicate that the problem is only going to get worse.

With this in mind, the best thing you can do to prepare for your twilight years is to enter retirement with a high level of assets and try to maintain it throughout retirement.

James Gerrard is principal and director of Sydney financial planning firm www.financialadviser.com.au