Those who have had experience with the aged care sector can attest to its complexity.
A big part of that complexity lies in its acronyms! Two examples are the RAD (Refundable Accommodation Deposit) and the DAP (Daily Accommodation Payment).
Effectively the RAD involves purchasing a room in a home using a lump sum of capital, whereas a DAP is the equivalent of renting the same room. To further confuse matters, it is actually possible to pay part RAD and part DAP! The amount paid varies from facility to facility, according to location and quality, and is agreed between the resident and the provider. Currently the average price is around $500,000.
If we use that figure as an example, if a resident did not have available capital, a rental amount equivalent to 8.36% per annum is imposed. So, on a $500,000 capital value, a rental (DAP) of $114 per day or $41,800 per annum would be struck.
It is interesting that this figure has risen dramatically in recent years, in line with rising interest rates. For example, prior to June 2022, the interest rate being used was only 4.07% per annum, meaning $20,350 per annum rental payments.
Effectively the cost of a daily accommodation payment has doubled in two years!
The question of whether to pay a lump sum is never clear cut. There can be many factors to consider, but one obvious decision centres on the actual interest rate, which is a government-controlled rate, with no discretion available by the facility. If a resident elects to retain capital and pay the daily accommodation payment, that capital must earn an assured low risk after tax return in excess of 8.36%!