Aged Care: Is paying a large upfront RAD your only option?

By Luke Kelly, Luke Kelly
Financial Adviser
13 October 2021

Australia has one of the highest life expectancies in the world (behind countries like Iceland, Japan and Switzerland) and rates are continuing to climb. But, as our parents and loved ones get older, it is important that we start the discussions early about aged care. No one likes talking about getting old, but waiting until someone has had a fall or has lost capacity to discuss their aged care intentions, will put you in a state of panic and emotional distress as you rush to find a suitable aged care provider. The stress of finding an aged care facility is often compounded by the confusion and anxiety of deciding how to pay for residential aged care, as well as, working through the long list of different aged care costs. Although there are other costs, such as the basic daily fee, the means-tested fee and additional services fee, it is what can be the large accommodation costs that result in the most confusion.

The cost of accommodation is set by the provider and is fixed at entry. Once you (your parents or elderly loved ones) have been offered a room for residential care, the facility will provide you with three options on how to pay the accommodation costs – Buy, Rent – or a combination of the two.

RAD: A Refundable Accommodation Deposit, or RAD, is the “buy option” and means you are paying for your accommodation upfront as a lump sum. It is Government guaranteed and fully refundable.

One of the biggest myths in aged care is that the only option available is to fork out the entire RAD immediately. With upfront accommodation costs tipping into the millions of dollars per room, elderly Australians, or their children who are making the financial decisions, are often panicking to sell their cherished family home to come up with these large amounts of money. Selling the former home is not your only choice.

DAP: This leaves the rental style option, paying for the accommodation as a DAP (Daily Accommodation Payment) means that you will be charged interest at a Government prescribed rate instead of paying the lump sum. The interest rate from 1 October 2021 is 4.01%.

Example:

A room at an aged care facility advertises an entry price, or RAD of $1,000,000. This gives the resident the choice to “buy” the right to live in the room for $1,000,000 or “rent” the room for $109.86 per day ($1,000,000 x 4.01% / 365 days) as a DAP. As well as the DAP, the resident will also be required to pay a basic daily fee of $52.71 per day, a means tested fee (subject to their level of assets and income) and potentially an additional services fee that is exclusive to each provider. They could also choose part buy and part rent. If the resident only had $350,000, they could use part of this as the RAD and deduct the DAP from this amount. This strategy buys them some time before having to sell their family home.

Summary:

As a general rule of thumb, it is a good idea to pay as much of the RAD as possible to minimise the DAP. The RAD is refundable to the estate, whereas the interest you pay on the DAP is gone forever. Either way you get the same accommodation. However, you need to consider the ability to fund cash flow shortfalls for the next few years, until the family home can be sold. Note, the average length of stay in residential care is less than three years or maybe the person going into care may be palliative (so may not be in aged care for a long time) and hence wish to retain their assets for the family.

Everyone’s situation is different and speaking to an aged care accredited financial adviser would assist you in making the right financial decision. Contact the team at PKF Wealth today.