Aged care is an incredibly complex topic. I will try to simplify a key aspect when it comes to your options for paying up-front or ongoing fees for your accommodation.
When moving into aged care, most people will pay the market price for their accommodation, or negotiate a lower price.
Retirees with limited means pay an accommodation cost calculated by the government. Whatever the sum, you have the choice of paying a lump sum Refundable Accommodation Deposit (RAD), a rent-style Daily Accommodation Payment (DAP), or any combination of the two.
All residents also pay a basic daily fee of $52.25 a day, and possibly a means tested daily care fee - that depends on your assets and income. But we are going to focus on RADs and DAPs in this column.
Any RAD not paid up-front accrues interest at a rate set by the government - currently 4.10 percent a year.
The DAP is simply the interest on the unpaid balance of the RAD. For example, if the RAD was $500,000 and you put down $200,000, the DAP would be $34 a day.
If you paid no RAD, the DAP would be $56 a day; and if you paid the RAD in full there would be no DAP.
When you leave the aged care facility, your RAD will normally be refunded to you or your estate - so if someone else has helped to pay the RAD, a loan agreement is vital.
Because the RAD remains your money, you can choose to deduct your DAP from your RAD.
Continuing the same example, you could pay $200,000 as a RAD and then have $34 a day DAP deducted from the $200,000. This option means that the RAD will keep decreasing and the DAP will slowly increase.
So you may start out deducting $34 a day from $200,000, but after a year the $200,000 has reduced to around $187,500 and the DAP has increased to $35 a day.
After five years the RAD would be down to $132,000 and the DAP would have risen to $41 a day. It's like a kind of reverse mortgage.
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Some people use rules of thumb like, "If I can earn more in my investments then I'm better off paying by DAP," but it's really too complex for that.
One benefit of paying a RAD is that it is an exempt asset for pension purposes. So, if you receive a part age pension, depending on your circumstances, paying a RAD may increase your pension and more than offset what you could be earning on those investments.
But the RAD is not exempt for means tested daily care fees: it is earning an effective 4.10 percent by offsetting the cost of the DAP.
The main benefit of paying by DAP is that you don't need to come up with a lump sum. In addition, the interest rate is in line with other lending rates and borrowing a bit each month is cheaper than borrowing a lump sum. But if you pay solely by DAP it can become hard on your cash flow.
If you are a homeowner, much will hinge on whether you keep or sell your home. If kept, the maximum value included for means tested fees is $171,535, and its value is exempt from age pension calculations for two years.
If sold, money in the RAD and any surplus funds will count for aged care means testing and the surplus funds will be assessable for the pension.
Some people think the aged care facility or government will force them to sell their home and pay a bond, but that's not true.
How you pay, and whether you keep or sell your home is up to you.
Paying by a combination of RAD and DAP is increasingly popular. Reasons include preserving age pension payments, minimising aged care costs, estate planning reasons and to keep the home if you don't want to sell it, or can't.
How you pay for your aged care accommodation can have a huge impact on all these areas. Because it is so complex, it is well worth seeking advice from a financial planner who specialises in retirement living and aged care.
Noel answers your money questions
Question:I own three investment properties all mortgaged, and have sufficient funds in my superannuation to pay out the debts.
Is it possible to direct in my will that the money from my superannuation will be used to pay off the mortgages, before the properties are distributed to my children.
I hope this will avoid the 17 percent super death duty to my children - I am aware that they will pay capital gains tax at a later date if they dispose of them.
Answer: It's not that simple. A payment to a member of a super fund is not a death benefit. It is a payment after the member's death and as such it will be either not to a member (many deeds make death an event that terminates membership) or unlikely to meet the requirements of SISA Section55A which requires payment after death to meet operating standards.
As I understand it the term "operating standards" do not seem to countenance a payment to a member after death. You could ask the tax office for a private ruling but I would be surprised if they approved it.
A much cleaner way to achieve your goal of avoiding the death tax is for you or your attorney to withdraw the money in super tax-free before you die, and deposit it in your bank account. It could then be used to pay out the mortgages when deemed appropriate.
Just keep in mind if the properties are positively geared when rental and interest is accounted for, the beneficiaries may rather be left the encumbered properties plus the cash. This is a matter to discuss with your solicitor.
Question:I am enquiring on behalf of my parents, who are 68 and 65. My father is on the pension and my mother is not entitled to the pension as yet. I have also set up a family trust with them as the beneficiaries.
My father has settled a court case recently related to a work injury he sustained while working and is about to receive a lump sum payment as a settlement of over $100,000.
Will this affect his pension payment and if so what can I do to minimise the effect. I have heard that if the lump sum is directed towards home renovations the money spent on renovations will not count for the assets or income test.
My father was also considering contributing the money to super - is that possible his age? The other option is to put the entire amount in the family trust - is this a good idea.
Answer: To the best of my knowledge the compensation payment will not be regarded as income for Centrelink purposes but it may be worthwhile checking with them before you make any decisions about the money.
Funds used for home renovations, or for travel, will not be counted by Centrelink for pension eligibility. Your father would not be eligible to put the money to superannuation unless he passes the work test which involves working 40 hours over 30 consecutive days in the financial year he makes a contribution.
In any event, unless he has substantial other assets I doubt the benefit of placing the money in superannuation. It's difficult to hide money using family trust these days as Centrelink can look behind the trust to establish beneficial ownership of the assets. If the money was placed in your mother's name in superannuation it would not count until she reaches pensionable age, but that would be a very short term strategy given she is 65 now.
Question:I have approximately $250,000 in super and wish to make a one-off contribution of $45,000. I am 59 years old and retired. Do I pay tax on my contribution? When it comes to drawing down on my super will I have to pay tax again? I am on a Disability Support Pension and so don't need to draw on my super at the moment but my circumstances might change in the future.
Answer: You could contribute up to $25,000 as a tax-deductible concessional contribution but you will incur 15 percent entry tax.
Based on what you have told me you appear to be a low-income earner so a tax deduction may be of no use to you, and you may be better off making a non-concessional contribution of $45,000 on which there is no entry tax. Once you reach 60, all withdrawals from super are tax-free.
Question: My wife and I are both retired. My super is with WA Super, my wife's super is with Colonial First State. They are to merge soon. Is there anything to stop us merging our super into one to save on paying separate fees?
Answer: You are not allowed to have a joint superannuation account - but I suggest you treat this is the perfect time to analyse your superannuation, decide if any life insurance which may be in the account needs to be changed, and analyse what fees you are paying now, and how your fund has performed in relation to its peers.
This is the perfect time to reflect on your retirement strategies, and make changes as necessary.
- Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. email@example.com