Understanding accommodation costs in aged care

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In our first article, ‘The first step in accessing aged care’ we provided an overview on the types of aged care services available and how advisers can help their clients access these services. In this next article in the series on aged care, we explore how to help your clients understand the accommodation costs associated with residential aged care.

The perception that aged care accommodation is expensive

Many clients perceive that aged care accommodation will be expensive. It can be true, much accommodation in Australia, including residential aged care, is expensive.

As you would expect, the costs of residential aged care vary according to locations – from major cities to regional areas. According to the Aged Care Financing Authority, the average agreed aged care accommodation prices (at 6 April 2017) were $256,000 in remote areas, $316,000 in regional areas and $410,000 in metropolitan areas.

Even in individual suburbs, prices vary. For example, according to data available via the My Aged Care portal rooms in residential aged care facilities in Parramatta, New South Wales, range from $200,000 for a shared room and bathroom to $550,000 for a single room and bathroom (at 12 March 2018). As a reference for the cost of other accommodation, the median house price in Parramatta is $1,302,500 and the median apartment price is $650,000 (Source: RP Data, 5 March 2018). It is true, however, that in many areas around Australia the difference between house prices and aged care accommodation prices may be marginal.

While aged care accommodation can be expensive, the key issues for a client considering entry into residential care are whether the expense offers value and whether or not aged care is affordable.

Assessing aged care accommodation payment options

A person may have to pay an accommodation payment or contribution when they enter residential aged care. Accommodation payments and contributions are determined by a resident’s assessable assets and income. Whether a resident pays an accommodation payment or contribution will depend on whether their means-tested amount exceeds the maximum accommodation supplement at the time of entry.

An accommodation contribution will be payable by a low-means resident who is eligible for a partial Government subsidy towards the cost of their accommodation. A low-means resident has a means-tested amount less than the maximum accommodation supplement at the time of entry.

An accommodation payment will be payable where a resident has a means-tested amount of greater than the maximum accommodation supplement at the time of entry or chooses not to disclose their assets and income. These residents will not be eligible for any Government subsidy towards the cost of their accommodation. A resident’s accommodation payment will be determined by negotiation with the aged care provider and cannot exceed the amount published by the provider on the My Aged Care portal.

Residents have up to 28 days after entry to decide how to pay for their accommodation. They have the option of paying their accommodation payment or contribution as:

• a fully refundable lump sum referred to as a refundable accommodation deposit (RAD) or refundable accommodation contribution (RAC);
• periodic payments referred to as a daily accommodation payment (DAP) or daily accommodation contribution (DAC); or
• a combination of lump sum and periodic payment.

Where a resident decides to pay for their accommodation as a RAD/RAC within 28 days after entry, they will have six months to make the payment.

Where the resident decides to pay for their accommodation as a combination of RAD/RAC and DAP/DAC, the DAP/ DAC can be deducted from the RAD/RAC.

How can clients afford residential aged care?

Considering the cost of aged care accommodation, how might clients actually afford entry into residential aged care? Let’s look at the answer to this this question through the eyes of Evelyn, aged 87.

Evelyn, from Parramatta in NSW, has decided the time is right to move out of her long-held family home into residential aged care. Her late -husband died a few years back and it has become increasingly difficult for her to manage daily life, even with regular help from her extended family. She has been assessed by the Aged Care Assessment Team and received approval for residential aged care.

Evelyn’s home is valued at $1,302,500. She has bank savings of $100,000 and personal assets of $10,000.

Evelyn and her family have found an aged care facility they are very happy with and a single room is available with a RAD of $550,000 or equivalent DAP of $86.19 per day.

Evelyn is happy to consider financial alternatives to fund her entry into care, including renting or selling her former home, but is concerned that she won’t be able to afford this room.

The first year cashflows for Evelyn if she was to either retain and rent, or sell, her former family home are shown in the table below:

Cash flow	Keep and rent former home	Sell former home
Age Pension	$11,190	$0
Investment income i	$3,000	$25,575
Rental income ii	$26,000	$0
Expenses	-$2,600	-$2,600
Total	$37,590	$22,975
Care fees
Basic daily fee	$18,038	$18,038
Means-tested care fee	$7,150	$23,064
DAP	$31,460	$0
Total	$56,648	$41,102
Net cash flow	-$19,504	-$18,127
Estate value iii	$1,425,309	$1,394,122

i Term deposit earning 3% p.a.
ii Net rent after expenses
iii After tax and Medicare levy and assumes former home capital growth of 2.5% p.a.

Although Evelyn is concerned about affordability, we see these expenses are manageable as she has sufficient bank savings to fund negative cashflows into the future in each case above.

Avenues to improve cashflow and estate planning outcomes can include alternative investment solutions such as the Challenger CarePlus, and, variation of the accommodation payment or contribution as a lump sum and/or periodic payment.

Our final article in this series will be available in April. To find out more about aged care, visit our website and try out our Aged Care Calculator (requires login).

This information is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 for licensed financial advisers. It is not intended to be financial product advice or legal advice and should not be relied upon as such. Examples are illustrative only and should not be relied on by individuals when making investment decisions.