The Australian aged care system is on the verge of significant changes, with some families facing steep increases in costs that could exceed $100,000 per person.
According to financial adviser Nick Bruining, these changes, set to take effect in mid-2025, will drastically alter the financial landscape for individuals entering residential aged care. In light of this, Australians are increasingly grappling with how to fund their care needs while balancing financial prudence.
One approach that may seem logical—selling the family home—could prove to be a costly mistake, not only in terms of immediate financial impact but also in long-term repercussions, including losing access to Centrelink pensions.
The proposed reforms to Australia’s aged care system are designed to bolster the financial viability of care providers, but they come at a significant cost to individuals.
A key change is the introduction of a new five-year retention rule for Refundable Accommodation Deposits (RADs). The RAD, typically paid as a lump sum for accommodation in a care facility, will no longer be fully refunded to the estate upon a resident’s death.
Instead, aged care facilities will be allowed to retain up to 2% of the RAD each year for a maximum of five years. For a $500,000 RAD, this could mean a reduction of up to $50,000 in the final refund, reducing the amount passed on to beneficiaries.
In addition, the maximum RAD will rise to $750,000, with the possibility of further increases due to indexing. Meanwhile, the lifetime cap on means-tested care fees will also jump from $82,018.15 to $130,000. Combined with daily accommodation and “hotelling” supplements, the cost of aged care is set to rise substantially, potentially exceeding $100,000 for many seniors.
In many cases, families may be tempted to sell the family home to cover these rising costs, especially when large sums are needed upfront. However, as Nick Bruining explains, this decision can have far-reaching financial consequences, particularly for those relying on Centrelink support.
Centrelink’s asset test exempts the family home for up to two years after a person moves into aged care. This means that retaining the home allows seniors to continue receiving their age pension, helping to offset some of the daily care costs.
However, if the home is sold, the proceeds are subject to means testing, which could result in the loss of the pension altogether.
Additionally, selling the family home can trigger capital gains tax liabilities, especially if the property has increased in value over time. By holding onto the home, families may be able to defer these tax payments, or even avoid them altogether if the property is inherited by beneficiaries.
Instead of selling the home to pay the RAD upfront, families should consider other options, such as the Daily Accommodation Payment (DAP). The DAP allows individuals to make payments over time rather than committing a large lump sum.
While the interest rate for the DAP is set at 8.38% per year (as of October 2024), this option provides greater flexibility and preserves capital, which can be beneficial for future financial planning and estate management.
As Bruining points out, families should carefully evaluate their loved one’s net financial position before deciding whether to pay the RAD in full or opt for a DAP. The decision should be informed by how long the payments need to last, the financial impact on the estate, and potential tax liabilities.
The changes to the aged care system underscore the importance of obtaining professional financial advice. With the costs of care rising and the rules becoming increasingly complex, working with a specialist aged care financial planner can help families navigate these challenges effectively.
Ultimately, the choice to sell the family home may seem like a straightforward solution, but it carries significant risks.
By exploring alternative payment methods and retaining the home where possible, families can protect their financial position and preserve Centrelink benefits, all while ensuring their loved ones receive the care they need.
Credits:
Nick Bruining’s insights on the pitfalls of selling the family home and the financial ramifications of upcoming aged care reforms were informed by his articles, “Why selling the family home to fund aged care may cost you a Centrelink pension” and “How aged care fee changes could cost Mum and Dad an extra $100,000 each,” published in The Western Australian.
Any decision made about aged care funding always results in people being potentially worse off, and some better off. Regardless, the long held belief that having paid taxes cannot equate to aged care being provided at minimal cost to the consumer. At no time in our lives are we able to, nor do we expect, that we can consume goods or services at below cost or market rate. Why should we expect that aged care is different just because we paid tax? Secondarily, we all hope to be able to help our children financially during our lives, and after we have died. That does not mean that someone needing aged care should not benefit from their life long sacrifices, to instead maximise their children’s inheritance. That may sound harsh, but the reality is children of residents, more often than not, make decisions about where their parent will go and what they are prepared to agree to be paid. Speak to any provider and they will recount conversations had with children whose only focus is “their inheritance.”
Not true yes they need help to buy their car but they most of the time contribute a lot indirectly as inflation uncewaze price increase and now providers are spreading wrong agenda that all children want is inheritance very wrong not true inspite if they will sale of property provider qilk take away all money in their excavated inflated ok rice and now new scame by these people to snack their family home and bring children on foot path we didn’t work hard for to pay this greedy buisbess peoole our life long saving qe need our children have roof on their head and taxpayers money eatern by veurocate not individual care recipients I prefer give up agecare and call someone under personal sponser visa who can stay as au pair and look after old person together with children like that in the absence of children they can get services and family can help them rest of time house put on rent from that rent old person pay to their children accommodation and f I id electricity and outgoings like that parent gmfeel good they get chance to stay with g o and go get family atmosphere where they get personal touch care though every children’s are nitxsame than older people out their house in rent from that rent hire small apartment and can self managed their home care package and can pay diffrance from rental income and 3very one happy except provider as their income can reduced