The cost of living in aged care is about to increase from April 1 as interest rates for aged care reach a 10-year peak of 7.46% – a dramatic rise from the lowly 4.01% just 18 months ago.
As a result, anyone who moves into aged care from April onwards, or those who move rooms or homes, will be paying more than their neighbours.
Everyone who enters aged care has to pay an accommodation fee, which could be a daily accommodation payment (DAP), a lump sum known as a refundable accommodation deposit (RAD) or a reduced daily accommodation contribution (DAC).
All three of these payments are dependent on the maximum permissible interest rate (MPIR) for aged care that was in place on the day a resident moves in.
Rachel Lane, Principal of Aged Care Gurus, explained the difference between the upcoming interest rate hike and the interest rate from October 2021 in The Sydney Morning Herald.
“The increase means that an aged care bed with a RAD of $550,000 had an equivalent daily payment of $60/day ($22,055/year) in October 2021,” Ms Lane said.
“From April, that same bed will have a daily payment of $112/day ($41,030/year).
“While $550,000 is a typical price (it is the cut-off for requiring Government approval) in Melbourne and Sydney it is not uncommon to find bed prices of $1 million plus.”
The 7.46% MPIR is the highest it’s been since 2012.
Residents also have to pay a basic daily fee that covers the costs of things like food, cleaning and personal care which is capped at 85% of the annual single basic Age Pension – which has just increased to $1,064 per fortnight.
This means residents could pay up to $75 per day for their basic daily fee.
“You can also pay a means-tested care – based on your assets and income – up to $358/day capped at $31,707/year and $76,097 over your lifetime,” Ms Lane said.
“Beyond that are personal expenses which may include extra service fees for things like wine, entertainment and hairdressing as well as clothing, medication and gifts.”
Although daily fees do fluctuate with the Age Pension, the upcoming MPIR rise will only affect people moving into aged care or changing accommodation as the rate is applicable to the day a resident enters care.
But Ms Lane provided a warning for individuals and families as even though aged care is means-tested, it may not always be affordable. She even said that the option of selling a house prior to moving in might not be the best one.
“Let’s look at Shirley. She has a home worth $950,000, $100,000 in investments and $10,000 in personal assets,” Ms Lane said.
“Her personal expenses are $25 per day, she receives $27,664 a year in Age Pension and $3,000 a year in interest. The aged care home has a RAD price of $500,000.
“If Shirley pays by daily payment her cost of care will be $189 per day ($69,054/year), of which $102 is her accommodation payment. For most residents, this will be the situation when they enter aged care.
“Shirley’s costs exceed her income by $38,390/year.”
Ms Lane said that if Shirley was to sell her house, her pension would be reduced and her means-tested care fee would increase.
Instead, options such as using investments to pay a RAD and deducting daily payments from it through the Government’s Home Equity Access Scheme could help.
Any financial advice in this article is general in nature. It’s recommended that anyone entering aged care speaks with a licensed financial planner or aged care financial advisor to discuss their best options.