The aged care industry is not only one of the fastest growing industries in Australia, it is also one of the most complex, as anybody faced with moving to aged care accommodation knows. To make matters worse, the rules are continually changing - the result is complexity piling on complexity.
There will be a major change on 1 October: an adjustment to the maximum permissible interest rate (MIPR), which is used to calculate aged care accommodation costs. The rate today is 5.54 per cent p.a., and it will drop to 4.98 per cent p.a. On the surface this would appear to make aged care cheaper, but as always, there are winners and losers.
First, you need to understand how the system works. Whatever you don't pay as a lump sum refundable accommodation deposit (RAD) on entry, you pay as a daily charge (known as a DAP), which is calculated at the MPIR.
So if the Market Price RAD is $400,000 and you pay $200,000, you will pay the remaining $200,000 at 5.54 per cent interest as a daily fee, which is $30.36 a day. If you pay the full RAD there is no interest (DAP); pay no RAD and you will pay a DAP which is the interest on the full amount: $22,160.
The winners will be those who pay the market price for their accommodation. At today's rate, a RAD of $400,000 would have an equivalent daily payment of $61 a day. Under the new rate, the equivalent daily payment is $55 a day, a saving of just over $2000 a year by moving in 10 days later.
Age Care Guru Rachel Lane points out that the losers are people who are classified as low means. For them, a drop in the interest rate actually increases the price of their lump sum - this may seem illogical and unfair, but it's true.
Suppose the market price RAD for a facility was $400,000. If a person had $1 million of assets, the maximum they could pay would be $400,000. Now think about Shirley, who is a full pensioner with $165,000 of assessable assets. Shirley qualifies as a low means resident and her means-tested daily accommodation contribution (DAC) is $55 a day.
If she moved in today, the MPIR would give her an equivalent lump sum refundable accommodation contribution (RAC) of almost $366,000 - an impossible task for someone with $165,000. But the way the RAC is calculated, under the lower MPIR next month, the equivalent lump sum will be just under $407,000 - harder still and now more than double her total assets. This is the irony - a person of limited means pays more than a millionaire.
The rate you pay is set on the day you enter care. So what can Shirley do? One option is to move in before 1 October, which would reduce her RAC amount by around $40,000.
Another option, if she moves in after 1 October, is to restructure her assets. Simple asset reduction strategies such as gifting and pre-paying funeral expenses could have a big impact on her cost of care. She may also wish to seek advice about purchasing an income stream with an asset-test exempt amount.
Let's say Shirley reduced her assets of $165,000 through a gift of $10,000 and pre-paying her funeral expenses for $15,000. Her DAC would reduce from $55 a day to $43 a day (a saving of just over $4,300 a year). Her equivalent lump sum would reduce by almost $88,000!
Purchasing an income stream with an asset-test exempt amount could reduce her cost of aged care further; the extent of the benefit will depend on the amount she invests and her age. This is why, though many low means residents feel they can't afford financial advice, I think they can't afford not to get it. Just make sure you find a financial advisor who understands the aged care system - ideally a retirement living and aged care specialist.
Question: After your reading your article on Australia's version of a death tax l have a query. If one has paid 30 per cent tax on their concessional contributions due to earning above $250,000 does the full 17 per cent still apply or would only an additional 2 per cent apply?
Answer: The tax you refer to is 15 per cent plus Medicare levy and applies to that portion of the taxable component of a deceased's superannuation that is left to a non-dependent. A spouse is always a dependent. The entry tax on contributions has no relevance to this tax.
Question: I am 60 and have just recently gone back to work full-time. My wife is 59, and only works one day a week. We have two investment properties that currently financed with an interest only loan. At the current interest rate the rent income is cash-flow positive but not much. I am wondering if it's a good strategy to withdraw money from my superannuation to pay out the loan. Are we allowed to do this and are there any disadvantages in doing so?
Answer: Take advice, because to access your super prior to 65 you will need to satisfy a condition of release. It is possible that you may have done this if you have recently started a new job but that will depend on the facts.
Keep in mind that the interest on the investment loan is tax deductible, which reduces the effective cost to you while you are working. I would imagine that the returns on your superannuation would be greater than the net cost of the investment loan, so my advice would be to preserve the status quo and leave things as they are.
- Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. firstname.lastname@example.org