How does it work if one of us needs to move into care & the other remains at home?
This is the main area of concern for couples, who worry about being able to afford aged care, & whether they should use their investments to pay the Accommodation Payment as a RAD (Lump Sum).
The comment we hear mostly is; “If I use our investments to pay the RAD for the one moving into care, what will the one remaining at home have to live on. That is the existing investments are delivering income in the form of interest or dividends or rent or super pension payments. So if we cash them in we will lose that income”
What most people forget about is the interaction of the Age Pension with their financial situation. If a couple are not getting the full Age Pension or any Age Pension (due to their investments), then If they use some of their investments to pay the Accommodation Payment as a RAD (which is NOT counted as an asset for Age Pension purposes), then they may eligible to get more Age Pension or may need to apply to get some Age Pension.
Given that interest rates are so low, getting the full pension is the equivalent of having $1,048,000 invested in the bank. Ie the full pension for anyone in care (paid at the single rate-even if you are a member of a separated due to ill health couple) is $907pf ($23,582pa), if you could get 2.25%pa interest on $1,048,000, would deliver $23,580 in interest. Therefore, getting some pension in aged care is not only extremely helpful, it is quite highly leveraged in this low interest rate environment.
Further if you had to pay an Accommodation Payment of $550K, & if you used $550K that might have been available in the bank, then you lose the interest (at say 2.25%pa=$12,375pa) but then you save having to pay the DAP interest (currently 5.77%pa=$31,735pa) therefore this saves $19,360pa PLUS any increase in pension that may also accompany the saving in interest.
We had one client, who was reluctant to use $650K of his savings to pay his wife’s Accommodation Payment as a RAD. However, we showed him that by leaving the investments in place & paying the DAP, they would have a cash flow shortfall of around $15,000pa, which would have seen their investments fall over time by $15,000pa & growing. But if they used their savings to pay her Accommodation Payment as a RAD (Lump Sum), the Age Pension increased to $45,000pa combined & instead of a cashflow shortfall it resulted in a cash flow surplus of $9,700pa. Meaning that the surplus cash flow would start rebuilding their savings again.