What the lower MPIR means to aged care entrants
By Janet Manzanero-Caruana, Senior Technical Manager
A lower maximum permissible interest rate (MPIR) environment has led to some interesting situations relating to the level of accommodation payments for clients. This article reviews the impact the MPIR can have on a resident’s accommodation payments which depend on the resident’s financial circumstances at the time of entry to residential aged care.
Upon entering an aged care facility most clients will be asked to pay an accommodation payment or accommodation contribution.
Clients of ‘low-means’ have their accommodation costs fully or partially subsidised by the Government and may typically pay accommodation contributions in the form of a refundable accommodation contribution (RAC), daily accommodation contributions (DAC) or a RAC/DAC combination. Clients with higher means, known as ‘standard residents’, will pay a lump sum refundable accommodation deposit (RAD), daily accommodation payment (DAP) or a combination of both.
A lower MPIR environment can translate a low-means resident’s DAC to a higher RAC. In some cases, the RAC for low-means residents can be higher than the RAD advertised for standard residents so some facilities may cap the DAC or its equivalent RAC to the DAP or RAD they have advertised for standard residents.
What is the MPIR?
The MPIR is the interest rate used to calculate:
- the daily accommodation contribution (DAP) where the client is a standard resident and has not fully paid the agreed refundable accommodation deposit (RAD)
- the maximum refundable accommodation contribution (RAC) and
- the reduced daily accommodation contribution (DAC) where a low means resident has paid a partial RAC.
The MPIR is set every 1 January, 1 April, 1 July, and 1 October of each year, currently at 4.02% (set on January 2021), the lowest since 1 July 2006.1
The MPIR at the time of entry into residential aged care applies to the client’s DAP (or RAC and DAC for low means residents) for the duration of their stay in the facility. This can change if the resident is deemed a ‘new entrant’ if they choose to a move to another room in the same facility, move to another facility, or leave the facility and re-enter as a new resident.
Lower MPIR, lower DAP for standard residents
A DAP is paid where the client does not fully pay the agreed RAD. The DAP is the interest paid on the outstanding unpaid RAD.
Standard residents who have the financial means generally pay as much RAD as possible where the MPIR is higher than after tax returns on potential investments, for example, term deposits.
Where a resident has an unpaid RAD, a higher MPIR increases the client’s accommodation costs and a lower MPIR will result in the opposite. So a lower MPIR is more advantageous to a standard resident as shown in Example 1.
|Example 1 – DAP calculation for standard resident|
Rajeev enters as a standard resident and agrees to $500,000 RAD or its equivalent RAD/DAP combination. He pays part RAD of $400,000 and pays DAP on the outstanding $100,000.
The MPIR at the time he entered residential aged care is used to calculate the DAP. If the MPIR at the time of entry is:
The RAD or its equivalent DAP or RAD/DAP combination applies for the duration of a standard resident’s stay in the facility, so it is easier to estimate and budget the accommodation costs for a standard resident.
RAC calculation for low means residents
The cost of accommodation for a ‘low-means’ resident on the other hand is worked out differently.
A client is a ‘low means’ resident where their means-tested amount (MTA) at the time of entry to residential aged care is less than the maximum accommodation supplement ($58.69 pd at 20 March 2021). Because ‘low means’ residents generally have limited financial means they do not pay the RAD or DAP but can be required to make accommodation contributions towards their accommodation costs called the DAC. The Government pays the facility the difference between the DAC and the accommodation supplement which the facility is eligible per day of accommodation. The DAC may be paid as a RAC which is a refundable lump sum or as a DAC/RAC combination. The DAC is the lower of:
- the client’s MTA, which is based on the quarterly aged care means test, and
- the accommodation supplement which the facility is eligible for per day.
The accommodation supplement per day depends on whether the facility is:
- significantly refurbished or newly built
- meets certain building requirements whether or not the facility has more than 40% low means, supported, concessional and assisted residents per day.
The accommodation supplements as of 20 March 2021 are:
|Eligibility||Amount of Supplement|
|If a service is significantly refurbished or newly built|
|More than 40% low means, supported, concessional and assisted residents||$58.69|
|40% or fewer low means, supported, concessional and assisted residents||$44.02|
|If on the day the service meets building requirements in Schedule 1 of Aged Care (Transitional Provisions) Principles 2014|
|More than 40% low means, supported, concessional and assisted residents||$38.26|
|40% or fewer low means, supported, concessional and assisted residents||$28.70|
|If on the day of services does not meet those requirements|
|More than 40% low means, support, concessional and assisted residents||$32.13|
|40% or fewer low means, supported, concessional and assisted residents||$24.10|
|Example 2 – DAC for low means resident|
Merri enters as a low means resident. Merri’s MTA for the quarter is $30 per day. The facility meets building requirements in Schedule 1 of the Aged Care (Transitional Provisions) Principles 2014 and always has over 40% low means, supported, concessional and assisted residents and it is eligible for an accommodation supplement of $38.26 per day. Merri pays an accommodation contribution of $30, the lower of the MTA and the accommodation supplement.
The Government pays the facility an accommodation supplement of $8.26 per day, to cover the cost difference.
If Merri’s MTA was $40, she will pay $38.26, the lesser of $40 (MTA) and $38.26 (accommodation supplement).
|Tech Tip: For cash flow purposes the accommodation supplement cannot be determined in advance by a financial advisor therefore the client’s MTA is generally used to estimate the DAC or its equivalent RAC or DAC/RAC combination.|
DAC can be more than DAP
On 1 January 2021 the MPIR reduced to historic lows of 4.02% pa. Due to a lower MPIR, there are some instances where DAC can be more than the advertised DAP.
A client entering as a low means resident may have DAC that is higher than the advertised DAP that they would pay if they were a standard resident.
|Example 3 – DAC vs DAP|
Assume that Janice enters as a low means resident. The facility is a significantly refurbished facility that always has more than 40% low means, supported, concessional and assisted residents.
The facility is eligible for the $58.69 accommodation supplement. The MPIR when she enters residential aged care is 4.02% pa.
If she had been able to enter as a standard resident the RAD would have been $450,000. If the RAD was not paid, her DAP would have been $49.56 (i.e. $450,000 x 0.0402 / 365) or approximately $4,510 ($49.56 x 91 days) for the quarter.
Janice’s MTA at entry is $58. This is her DAC as it is the lesser of $58.69 and $58. Her estimated DAC for the quarter is $5,278 ($58 x 91 days).
The Government will pay an accommodation supplement of $0.69 per day to the facility (ie the maximum accommodation supplement of $58.69 less her MTA of $58). The Facility forgoes the $8.44 per day (ie difference between $58 and the $49.56)
Janice’s MTA will be reassessed quarterly and the DAC she will pay will fluctuate during her stay in the facility. The accommodation supplement paid to the facility will also fluctuate with Janice’s DAC.
In Example 3 it shows how a standard resident can pay less for residential aged care accommodation than a low means resident. For low means residents who are impacted by this, we have seen some aged care facilities willing to accept lower DACs than what is calculated by Centrelink. A facility may agree to cap the maximum DAC to the equivalent of the advertised DAP.
This is a business decision for the facility where it can opt to forgo some income because the amount of accommodation supplement that they will receive from the Government is not increased.
|Tech Tip: If a facility agrees to cap the DAC paid by a low means resident to an amount which is lower than that calculated by the government, the adviser and client should confirm the terms agreed on are correctly reflected in the accommodation agreement.|
Where the DAC is higher than or in the vicinity of the maximum accommodation supplement ($58.69 per day at 20 March 2021) and the client can enter either as standard or low means resident, depending on the strategy that can be implemented there are some key considerations such as:
- whether the client’s MTA is likely to remain at similar levels to the
accommodation supplement over the long-term (for example, the proceeds of a large asset may result in the client’s MTA exceeding the maximum accommodation supplement)
- the expected length of the client’s stay in the facility
- the importance of extra services to the client as extra services can only be purchased by standard residents
- the likelihood of their partner may also enter residential care
The DAP, RAD or RAD/DAP combination generally applies for the length of a standard resident’s stay in a facility. The payment does not reduce unless a resident runs out of funds and a financial hardship determination is obtained.
The DAC for low means residents, on the other hand, fluctuates with the quarterly aged care means test. Generally, for low means residents the DAC reduces over time as they draw down on their funds.
Low MPIR, higher equivalent RAC for low means residents
In situations where a low means resident comes into a significant amount of money such as an inheritance or proceeds from the sale of their former home, they can lose some or all of their age pension. In this instance, paying a RAC is a strategy to possibly retain some of their age pension as it is an exempt asset for the social security means test. This strategy may not necessarily reduce their means tested care fee as the RAC counts as an asset for aged care purposes.
The MPIR can make a substantial difference in the amount of RAC that a low means resident may pay. If the MPIR is higher, the RAC equivalent of the DAC is lower. Conversely a low MPIR can result in a higher RAC equivalent.
The calculation of RAC is derived from the DAC using the MPIR current at the time the new resident entered residential aged care:
DAC x 365 / MPIR = RAC
For example, the RAC equivalent of a $58 DAC where MPIR is 4.02% pa is:
$58 DAC x 365 / 4.02% = $526,617
Where MPIR is 6.69% pa, the RAC is only $316,442, so the difference is quite significant. It follows that to reduce the DAC, a low means resident pays a higher RAC where the MPIR is low.
Conversely, with a higher MPIR less RAC is required to be paid. This means a lesser amount can be exempt for the age pension means test, which may result in a lower age pension or none at all.
|Tech Tip: Where a low means resident has come into money and their MTA exceeds the maximum accommodation supplement, they may consider choosing to be a standard resident where the advertised RAD is lower than their maximum equivalent RAC or if they wish to access extra services. To achieve this, they can move to another room or facility and be reassessed as a new entrant.|
Calculating the reduced DAC when partial RAC is paid for low means residents
The maximum RAC fluctuates with the DAC, depending on the low means resident’s MTA and facility’s classification. If a partial RAC is paid, the remaining DAC is calculated using the MPIR at the time of the client’s entry to residential aged care.
The steps are:
Maximum RAC less RAC paid = unpaid RAC
(Unpaid RAC x MPIR) / 365 days = remaining DAC
|Example 4: Estimating the remaining DAC|
Joshua’s MTA (and DAC) is $58, assuming he enters a significantly refurbished facility with at least 40% low means, supported, concessional and assisted residents. The maximum equivalent RAC is $526,617 ($58 DAC x 365 days/4.02%). If Joshua wishes to pay a part RAC of $100,000, the remaining DAC is calculated as:
Step 1: $526,617 less $100,000 RAC = $426,617 estimated unpaid RAC
If the MPIR that applied was 6.69%, the equivalent RAC to $58 is $316,442:
Step 1: $316,442 less $100,000 RAC = $216,442 unpaid RAC
*The DAC for low means residents, can fluctuate with the quarterly aged care means test, so it’s important to confirm the terms agreed on are reflected in the accommodation agreement.
The MPIR at entry impacts on the resident’s accommodation costs during their stay in residential aged care. While the low MPIR is more beneficial to standard residents, there are new considerations for advisers and their clients who are low means residents.
If you have any questions, or would like more information, please contact the IOOF TechConnect team on 1300 650 414.
The information in this section of the website is intended for financial advisers only and is not to be distributed to clients. It has been prepared on behalf of Australian Executor Trustees Limited ABN 84 007 869 794 AFSL 240023, IOOF Investment Management Limited ABN 53 006 695 021 AFSL 230524, IOOF Investment Services Ltd ABN 80 007 350 405, AFSL 230703 and IOOF Ltd ABN 21 087 649 625 AFSL 230522 based on information that is believed to be accurate and reliable at the time of publication.