Big changes to aged care funding: What families need to know

From November 1, Australia's aged care system is set to undergo one of its biggest shake-ups in decades. The changes, introduced under the Aged Care Act 2024, aim to improve transparency, sustainability and quality of care.

But for families with loved ones entering residential aged care, they also bring new financial decisions - and new costs.

 A shift toward 'user pays' 

As more Australians need aged care, the government is changing how it's funded. Instead of increasing subsidies, we're seeing a shift towards a "user pays" model - meaning those with financial resources will contribute more to the cost of their care.

Aged care may seem like a distant "what if", but for older Australians, it's an increasing reality. One in five people over 85 reside in residential aged care, and another one in five access support through at-home services. With people living longer, these figures are only expected to increase.

Understanding, and planning for a transition is an increasing priority for retiring Australians.

 What are the new costs? 

Here's a breakdown of the key fees you'll encounter:

• Basic daily care fee. Paid by all residents, this covers everyday expenses like meals, cleaning and laundry. The rate is set at 85 per cent of the full aged pension and is currently $65.55 per day.
• Hotelling contribution. Based on their income and assets, some residents may pay up to an additional $22.15 per day for daily living costs.
• Non-clinical care contribution. Replacing the old "means-tested care fee", this is calculated using the income and assets of both the resident and their spouse. Ranging from $0 to $105.30 per day, it's also subject to a lifetime cap of $135,319, or four years.
• Higher everyday living fees. These can vary by facility and cover additional or higher-quality services beyond the minimum standard of care.

 What about the room? 

In addition to ongoing care, there's a bond payable for the room, known as a Refundable Accommodation Deposit (RAD). While the previous costs are largely pre-determined, here there are options. You can:

• Pay the RAD as a lump sum in full.
• Skip the lump sum and pay Daily Accommodation Payments (DAP) - like renting the room.
• Pay part as a lump sum and the remainder as ongoing payments. 

 Important change to RADs 

Previously, the RAD was fully refundable. But from November 1, providers can retain 2 per cent of the RAD per year, up to five year

For example, if you paid a $750,000 RAD, the provider can keep $15,000 per year, up to a total of $75,000. The change means the RAD is no longer fully refundable - something families should factor into their planning.

The alternative is to pay the regular DAP, however these payments can be even more steep. For a $750,000 room, the DAP would currently be $57,075 per year - and these payments are definitely-not refundable.

 What should families be thinking about? 

Despite the overhaul, one thing hasn't changed: aged care decisions are complex. Here are some key things to consider:

Know what you'll pay

The first challenge families face is figuring out exactly what costs they will face. The formulas calculating means-tested payments are complicated. Not all assets and income are treated equally.

For instance, net rental income is counted as is, whereas income from financial assets such as savings, shares or super is assumed at deemed rates. Some assets, such as the RAD or the home, can be exempt from the assets test entirely. Clear as mud?

The result? Seemingly innocuous decisions can have unintended - and often irreversible - consequences. Online calculators help, but only if the inputs are accurate.

Particular care should be taken when deciding what to do with the family home. Selling to help fund care costs might seem logical, however it can reduce age pension entitlements and even increase the cost of care.

Alternatives to consider may be renting out the home, opting for the daily payments (DAP), or paying the RAD from savings, super, or investments. Each has pros and cons - and potential tax consequences depending on the assets. The 'what ifs' quickly multiply and its worth seeking professional advice before making these decisions.

Another time to tread carefully is when transferring to parent's accounts. It's common for children to want to help, but gifts to Mum and Dad are captured by means testing, impacting care fees and pension entitlements. These mistakes are hardest to correct, as Centrelink's gifting rules can capture the money for up to five years, even if it's sent back.

Also bear in mind that on a resident's passing, the RAD is returned to their estate. It is therefore crucial that Wills are up-to-date, or amended if needed. Powers of attorney (medical and financial) are essential for your loved ones to make decisions in a timely manner. Proactivity is crucial here as entering care often coincides with a loss of capacity, meaning documents cannot be updated.

Our number one advice: have a plan

Don't leave these decisions to be made in crisis mode. Having a plan means:

• You understand the costs and how they'll be covered.
• Action is taken in a timely manner.
• Decisions are made with clarity and optimised financially.
• Your family isn't left scrambling during an already stressful time.

The event may be far off, but being prepared allows the focus to be on getting you the care you need, when you need it.
 

Benjamin Lembo is a financial adviser at RSM Financial Services Australia in Melbourne (AFSL 238 282), advising clients on wealth management, retirement planning, aged-care financial planning and succession planning. 

This article was originally posted in The Canberra Times.