Home › Insights › Aged Care Financial Guide

Aged Care

Navigating Aged Care Costs: A Financial Guide for Families

Merit Financial Services · February 2026 · 7 min read

The transition to residential aged care is one of the most significant financial and emotional decisions a family will face. The system is complex, the costs are substantial, and decisions often need to be made quickly — sometimes within days of a hospital discharge. Understanding the financial framework in advance can make an enormous difference to both the quality of care and the preservation of the family's wealth.

RAD vs DAP: Two Ways to Pay for Your Room

When entering residential aged care, residents are typically asked to pay an accommodation payment. There are two primary options:

• Refundable Accommodation Deposit (RAD): A lump sum payment (often $300,000–$800,000+) that is fully refundable when the resident leaves the facility, either to them or their estate. The RAD earns no interest for the resident, but the facility cannot charge a daily accommodation payment on the portion paid as a RAD.
• Daily Accommodation Payment (DAP): A daily fee calculated as interest on the unpaid RAD amount, using the Maximum Permissible Interest Rate (MPIR), which is published quarterly by the government. As of early 2026, the MPIR is approximately 8.36%.
• Combination: You can pay any combination of RAD and DAP. For example, pay $200,000 as a lump sum RAD and the remaining room price as a daily DAP.

The choice between RAD and DAP has significant financial implications and depends on the resident's asset position, cash flow, Age Pension entitlement, and estate planning goals.

The Family Home and the 2-Year Rule

The family home receives special treatment in the aged care means assessment:

• If a protected person (spouse, dependent child, or certain carers) continues to live in the home, it is fully exempt from the assets test — both for aged care and Centrelink purposes.
• If the home is vacated, it is exempt from the aged care assets assessment for 2 years from the date of entry into care. After 2 years, the home is assessed as an asset, capped at a specified amount (currently around $201,231).
• For Centrelink purposes, a vacated home is exempt for 2 years, after which it becomes an assessable asset at its full market value (no cap).

This 2-year window is critical. It's the period during which families must decide whether to sell, rent, or hold the property — and each option has different implications for aged care fees, pension entitlement, and estate value.

Means-Tested Fees

In addition to the accommodation payment, residents may be required to pay a means-tested care fee based on their assessed income and assets. This is calculated by Services Australia and can range from zero (for low-means residents) to a substantial daily amount. There are annual and lifetime caps on means-tested fees to provide some certainty:

• Annual cap: approximately $33,309 (2025–26)
• Lifetime cap: approximately $79,942 (2025–26)

Once the lifetime cap is reached, means-tested fees cease. Understanding where you sit relative to these caps helps forecast the total cost of care over time.

The Complying Lifetime Annuity Strategy

A complying lifetime annuity can be a powerful tool for managing the means assessment. When structured correctly, only 60% of the purchase price of a complying lifetime annuity is counted as an asset for aged care and Centrelink purposes. The income stream is also assessed favourably.

This can effectively reduce a resident's assessable assets by 40% of the amount invested in the annuity, potentially lowering means-tested fees and increasing pension entitlements. However, lifetime annuities are irrevocable — once purchased, the capital is generally not accessible. This strategy requires careful modelling and should only be considered as part of a comprehensive plan.

Sell vs Hold: A Decision Framework

The question of whether to sell the family home is among the most consequential. Consider these factors:

• Sell: Provides liquidity to pay the RAD (which is refundable), eliminates holding costs, and simplifies the estate. However, sale proceeds become assessable financial assets, increasing deemed income and potentially reducing pension entitlement.
• Hold and rent: Preserves the capital asset and generates rental income, but the rental income is assessable and the property (after 2 years) becomes an assessable asset. Management of the property may be burdensome for the family.
• Hold vacant: Maintains the CGT main residence exemption (if the resident intends to return) and avoids rental income complications, but generates no income and incurs holding costs.

There is no universally correct answer. The right decision depends on the property's value, the resident's other assets, the likely duration of care, family circumstances, and estate planning objectives.

Estate Preservation While Meeting Care Costs

A well-structured aged care financial plan balances the cost of quality care with the preservation of wealth for the resident's beneficiaries. Key principles include:

• Maximise any RAD payment where it reduces ongoing DAP costs and the capital is preserved as a refundable deposit.
• Minimise assessable assets and income where possible through legitimate structuring (gifting within allowances, prepaid funerals, annuity strategies).
• Maintain adequate liquidity outside the RAD for personal expenses, medical costs, and contingencies.
• Review and update estate planning documents (wills, powers of attorney) before or shortly after entry into care.