On Feb 26, 2021 the final report from the Royal Commission into Aged Care Quality and Safety was presented outlining 148 recommendations. The report was subtitled Care, Dignity and Respect, and the recommendations focus on raising the quality of care and providing more adequate services.
These are important objectives, as we heard harrowing tales of substandard care and abuse, but it will require significant additional funding to achieve and, as the report is at pains to point out, changing demographics mean that in future, there will be proportionally less working age people to pay tax and staff aged care facilities.
As anyone who has dealt with the aged care system knows, it is complex to say the least. As the report outlines, the current means tested system favours property owners, and has different sets of fee systems for in-home care vs permanent residential care. Many of the recommendations in the report are focused on reducing complexity and equalising outcomes, while others are about funding the system overall.
So, what are some of the key financial implications of the report and what potential impacts might there be for Australians who anticipate needing to pay for aged care in the future? In the discussion below, we address some of the main proposals and explore how these could affect you.
Proposal: Phasing out the lump sum Refundable Accommodation Deposit (RAD)
Selling the home when entering aged care is often a necessary part of the transition to aged care, and the current Asset Test exemption treatment of the RAD mirrors the primary residence exemption given by Centrelink, and allowed many moving to aged care to maintain their Age Pension and others to access it for the first time.
As such the proposal to end the lump sum (RAD) payable when entering care will have a large impact on many. In addition, the lump sum RAD payment currently reduces the deemed income of clients, which typically results in lower means tested fee outcomes.
Let’s look at an example:
Doris is single and receives the full Aged Pension. Her only assets are a village unit worth $600,000 and $100,000 in the bank (no car, minimal contents).
Doris enters a nursing home permanently. She sells her unit, and Doris pays $550,000 for her room (RAD lump sum) protecting her full Aged Pension and leaving her with $150,000 in the bank.
From July 2023
Following the phasing out of RAD’s, Doris will be left with $700,000 in cash after the unit is sold, which will be fully assessed by Centrelink, therefore Doris loses most of her Age Pension. Doris will need to invest that cash carefully, to create an income stream to replace her government payment.
In addition, another strategy available to some clients paying a daily accommodation contribution (DAC), which involves converting the DAC to a lump sum refundable accommodation contribution (RAC) in order to shelter assets from Centrelink and therefore increasing the Aged Pension, will no longer be available.
Proposal: Abolishing the lifetime cap on means tested care fees
Currently there is a lifetime cap of $67,410 on the portion of aged care fees which are means tested. This has been recommended to be abolished. This will raise the cost of care, particularly for those with moderate to high personal wealth or those that may live for a number of years in aged care. Under the current system, fees often fall by about half, in their 3rd year of aged care due to reaching this fee cap.
Proposal: Increasing the overall cost of daily fees
Currently nursing homes have the benefit of the interest derived on RAD payments to support their operations. With interest rates being so low and RAD’s departing the system, care providers will need to pass on this cost in the form of a higher set of daily fees.
Proposal: Merging the home care system and residential care system
A further recommendation is aimed at simplifying some of the complexity by merging the in-home care and residential care system, incorporating a new funding model for home care. This is a bold move, but well overdue – clients will be less confused when moving between levels of care.
Proposal: Additional taxation to fund aged care
The report recognises the need for additional taxation to fund increased investment into aged care. While commissioners presented various approaches, one option is an across the board 1.0% aged care levy alongside the current Medicare Levy. Irrespective of the final approach it is clear that working age taxpayers will be making a greater contribution to aged care funding.
As we wait for the government to finalise the new fee system, the main aspects of ensuring a smart entry to aged care are:
- Making a shortlist of your top three facilities, in the years prior to needing care – so that you or family members are not forced into making a rushed and poor selection. Attention to location, cultural aspects, dementia specific needs and prior sanctions against the home should all be part of the consideration.
- Planning the finances ahead of time – to ensure better tax outcomes, entitlements being maximised, lower means tested fees.
- Ensuring government paperwork is pre-filled, and necessary Power of Attorney and Medical Guardian documents are in order.
Given the financial changes are not expected until 1 July 2023, some may consider entering the aged care system before this date, to access the more favourable fee system. A skilled financial adviser can run two sets of calculations to determine this comparison. If you or anyone you know needs help navigating financial planning for aged care please contact your FMD adviser.
General advice disclaimer: This article has been prepared by FMD Financial and is intended to be a general overview of the subject matter. The information in this article is not intended to be comprehensive and should not be relied upon as such. In preparing this article we have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained on this article to particular circumstances. FMD Financial, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained on this article. FMD Group Pty Ltd ABN 99 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977. The FMD advisers are Authorised Representatives of FMD Advisory Services Pty Ltd AFSL 232977.