If you have started looking at aged care options you would be reading about the Refundable Accommodation Deposit (RAD) and the Daily Accommodation Payment (DAP).
It’s worth understanding how they are related.
Just one part of Residential Aged Care Costs
Residential aged care costs are divided into 4 types:
- A Basic Daily Care Fee
- An accommodation payment (by RAD or DAP or combination of both)
- A Means Tested Care Fee
- Fees for extra or additional services.
The potential for government support will apply to your accommodation payments (2), and your means tested care fee (3). This level of support is determined by one single test.
The DAP is related to the RAD
All facilities must publish their accommodation cost as a daily payment (DAP), a lump sum payment (RAD), or a combination of both.
The combination of the two can be almost endless, and any single combination probably not that useful, except to demonstrate that the resident is able to mix their accommodation costs between a lump sum payment and a daily payment however they choose.
Working out the DAP equivalent for a RAD is very straightforward, all you need to know is the interest rate that links them.
This rate is known as the Maximum Permissible Interest Rate (MPIR).
What is the Maximum Permissible Interest Rate (MPIR)?
We like to think of the Maximum Permissible Interest Rate as a kind of equivalent to how much an aged care provider may have to pay to borrow money for the cost of building a bed.
So if a "bed" costs $300k to provide (including all the facility, the land and other costs), the resident can either stump up the $300k to cover the cost of the accommodation, or reimburse the provider for their interest cost as if the provider had to borrow the money to offer the resident the bed.
This interest cost is the MPIR, and it should probably reflect what the facility would have to pay as an interest rate to borrow money. (We could be wrong here - this is a best guess)
To the resident, it probably doesn’t mean much more than a choice between stumping up the cash (which is fully refundable and government guaranteed), or paying an interest rate on the cost of the bed - and a high one at that.
The MPIR is currently set at 5.76% (As at Jan 1 2017). While it can change over time, for the resident, it is fixed at entry.
There are not many investments that will pay a better rate than 5.76% (especially for no risk) so it is worthwhile paying as much of the RAD as you can (i.e instead of paying at the expensive interest rate). The question for the resident will be around how much cash they have to apply to the RAD, and how much cash they can afford to have tied up in a RAD when there are other costs - like the Means Tested Care Fee, the Basic Daily Fee and fees for extra or additional services.
MPIR, RAD, DAP - how they fit together
If you are clear on the "pay by interest/pay by lump sum" story outlined above, this should be easy to work out.
Say the room is offered for a RAD of $100 000, and the resident wants to pay by Daily Accommodation Payment (DAP), instead of handing over the $100k.
Simply work out the yearly “interest cost”, i.e $100 000 at the MPIR of 5.76%. The annual amount is $5 760. Next step, divide this by 365 to get a daily rate - and presto - there is your DAP - $15.78.
The resident is basically paying for the cost of the room at a high interest rate.
If the resident wants to pay $50 000 as a lump sum, and pay the remainder as a Daily Accommodation Payment - the calculation looks like this:
$50 000 at 5.76% = $2 880. Divided by 365, this is $7.89 per day. (This is in addition to handing over $50k as a RAD)
Another RAD/DAP combination - paying the DAP from the RAD
A unique part of the choice available is for the resident to pay the Daily Accommodation Payment out for the Refundable Accommodation Deposit.
It works a bit like this: the resident pays part of the RAD (i.e a chunk of money), then the DAP is drawn down from the RAD. Effectively, this daily payment slowly increases as the money originally handed over is drawn down.
It’s a little like a reverse mortgage, except the RAD does not offer any capital growth.
We will be looking more closely at this one. As the facility has the right to demand a minimum amount of RAD be held. This will need to be structured carefully to minimise surprises down the track.
RAD’s and the Centrelink Aged Pension
Funds handed over to the aged care facility to pay a lump sum deposit (RAD) are not included in Centrelink tests and therefore not assessable. We talk about why the Care Fee Estimator should tell you about this here.
This is a big advantage to be had when paying for accommodation by a lump sum deposit (RAD) and is a very important source of government support while in care.
Just pay by RAD, right?
Paying accommodation costs by handing over the full amount (i.e paying the full RAD), as cash, will save the resident paying a high interest rate, and this is obviously better than keeping the money in the bank.
Further, any money paid over to the RAD will not be included in Centrelink Tests for the Aged Pension. So the resident should expect improved aged pension eligibility. More money coming in means more government help and more manageable cash flows.
Is it that simple?
Unfortunately not. In many cases, a resident will not have the money available to pay the lump sum RAD and still have enough left over to fund the other costs.
Getting the balance right is a huge challenge.
Later Life Advice can help.