To Sell or Not to Sell? That is the Question!

Aged Care

Article by 

Michael Horin

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The number of Australians aged 85 and over is predicted to triple in the next 35 years. As Australians live longer, more and more will end up in residential aged care, with the number of beds required in facilities expected to increase from 225,000 today to 700,000 in 2050.

Whilst children may consider their parents to be many years away from needing aged care, the reality is that circumstances can change very quickly. When the time comes to assist parents with a move into care, expensive decisions must be made in a short time frame and often in a highly stressful and emotional state. Because of this, it is critical that advice is sought to avoid paying more than necessary for residential aged care, both upon entry and on an ongoing monthly basis.

RAD vs. DAP: Understanding aged care payment options

When entering aged care, families have the option to pay a hefty up-front refundable fee, called a Refundable Accommodation Deposit (RAD, formerly known as a bond) – which in some facilities may be over $1 million – or alternatively, a daily fee known as a Daily Accommodation Payment (DAP). To calculate the DAP, facilities multiply the unpaid RAD by the MPIR (maximum permissible interest rate) that the federal government sets.

The impact of rising interest rates on aged care payments

From the start of 2021 to today, this interest rate has risen from 4.01% to 8.38%, which has dramatically impacted how families choose to fund their care. In 2021, when interest rates were 4.01%, the payment on a $1 million RAD was $40,100 a year, or $109.86 per day. Now, with interest rates at 8.36%, that annual figure has more than doubled to $83,800 or $229.59 per day.

During these times of lower interest rates, many families opted to pay the DAP as they were earning a greater return on their investments. With the rate at 8.38%, most are attempting to raise the funds to pay the full RAD and avoid the incredibly high interest – but this may have unintended consequences.

Selling the family home to fund aged care: A risky decision?

It is quite common for those requiring aged care to be asset rich and cash poor, with their main asset being the family home. As a result, to fund the lump sum RAD, many families automatically choose to sell the home without full consideration and understanding of the potential repercussions. Most don’t realise that this decision has important implications for the fees payable and government entitlements received.

Centrelink means tested fee: What you need to know

Aged care facilities generate roughly 10% of their revenue from the fees they charge residents, with the other 90% coming from the federal government. The government pays the home up to $420 a day per bed that is occupied. Centrelink then assesses the resident’s assets & income via a means test to determine how much they must contribute towards this cost – in addition to the RAD/DAP payable.

For the purposes of this Centrelink Means Tested Fee (MTF), the family home is counted as an asset; however, its value is capped at $206,039, regardless of what it may be worth on the market. If the home is sold, the full proceeds from the sale are included in the means tested fee, and the amount that a resident is required to pay may increase dramatically. As an example, if a home is sold for $2M to fund the RAD, Centrelink will consider the resident’s assets to have increased by $1.8M.

How selling the home affects the Australian Aged Pension

On the other hand, for the purposes of the Australian Aged Pension, the home is exempt for calculations for two years after a resident moves into care. From year three onwards, the home is no longer considered a principal place of residence and instead is treated as an investment property, often resulting in the loss of the pension. However, if the home is sold when a resident enters care, this non-assessable asset is turned into a fully assessable asset, which can have a significant impact on the pension and may eliminate all entitlements.

The complexities of the RAD and asset tests

To make matters even more complex, the lump sum funds used to pay the RAD are excluded from the asset test for the purposes of the pension but included in the asset test for the purpose of the Centrelink Means Tested Fee.

As a result, whilst selling the home in order to fund the RAD and eliminate the DAP may seem like the appropriate choice on face value, there are many aspects to consider before making such an important decision. Before moving into aged care, it is vital a family seeks advice to ensure that any decisions made will not have unintended consequences and will result in the best financial outcome.

Michael Horin is an Aged Care Advisor at Joseph Palmer & Sons; he can be contacted at mlhorin@jpalmer.com.au or on 0408 347 413.

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Comments

  1. If we choose dap the interest rate is too high. Should go by reserve bank rate.No where on earth you could get that interest rate in any investment. Say we sell the property how long will the rap last? Suppose we live for 100 years This will affect only the part pensioners and full pension home owners. Children expect something from parents when they die and parents also would like to gift something for their children.

    Reply

    1. Hi Sarojini, you are certainly correct that the interest rate is very high at the moment. If a lump sum RAD is paid to the facility, once the resident passes the full amount is refunded to the estate which is then often passed down to the chilldren.

      Reply

  2. The situation is different and so are the calculations when only one spouse goes into permanent care and the other remains in the couple’s home. Could the financial advisor explain this too? Thanks. And of course the fact that you can also select to pay part of accommodation cost as RAD and the rest as non refundable daily fees. Thanks.

    Reply

    1. Hi Danijela, the rule you are referring to here is called ‘Protected Person’. If one spouse goes into care while the other stays at home, the spouse at home is protected and therefore the value of the property is not included in calculations as long as they stay at home. However that changes if the spouse that was living in the home enters care in future.

      Reply

  3. I didn’t expect my husband to go into a retirement home and we had retired 17yrs ago. 3years ago we were in a partnership with our son and retired from the partnership 2 yrs ago giving him the properties worth about at the time $3,500,000,00. Now the Government went back 5yrs. and is treating the property as owes, even though it is completely in his and his wife’s name and is no longer our property. Can centrelink do this. I also gave our other children $500,000 each.

    Reply

  4. Very little comment is ever made to cover the situation of a couple living separately because of illness.
    The home can’t be sold as the living partner still lives in the home.
    For over 4 years I was in that situation plus I paid a means tested supplement ,plus I volunteered over 10/hours a day looking after my darling in an Agedcare home 45 minutes away.
    I am not complaining but point out the Government has increased the contribution ,from July 1st 2025 to new self funded retirees.
    It is just so unfair to older Australians whose partners become terminally I’ll.

    Reply

  5. Seriously -where are solutions here- typical planner – “reactive”
    What about providing solutions to the public? They are there but you planners haven’t thought outside the square since changes in 2014. Where are responses to new act? Again, your industry wants to sell “annuities” and focus on “cash flow”. The model you are all forced to use is “flawed” big time. Check regulation 244b and provide “Options” backed up by “Facts” – help your clients- what about how every will written since 2014 – when changes came in can affect aged care – no mention of that – because you’re all herded like goats instead of seeing what is out there to help clients- horrible and quite frankly- negligent. After all you have had your client for years and cannot satisfy their Aged Care Needs satisfactorily- it’s a joke and you should all be ashamed and embarrassed.

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