In short

In residential aged care, a RAD (lump sum held by the provider) is exempt from the Age Pension assets test; a DAP (daily rent via the MPIR, currently 7.96% p.a.) leaves savings fully assessable. The family home is Age Pension-exempt for the first two years after entry. For residents near the taper zone, the RAD/DAP choice can shift pension entitlement by thousands per year.

When a parent or partner enters residential aged care, one of the most financially significant decisions the family faces is how to pay for the accommodation cost. The choice between a Refundable Accommodation Deposit (RAD) — a lump-sum upfront payment held by the provider — and a Daily Accommodation Payment (DAP) — ongoing rent calculated daily — has real consequences for the Age Pension means test, the means-tested care fee, family liquidity, and eventual estate flows. Getting this decision right requires understanding both what the RAD and DAP are and how each interacts with Centrelink's assessment framework.

What are the three ways to pay for aged care accommodation?

Residential aged care facilities set accommodation prices for their rooms. Once a price is agreed, the resident can pay it in three ways. The first is a full Refundable Accommodation Deposit, a lump sum paid to the facility and held until the resident leaves or dies, at which point it is refunded. The second is a Daily Accommodation Payment — ongoing rent, paid from income or assets, calculated as a daily rate derived from the room price. The third is a combination of a partial RAD with the remaining balance paid as an ongoing DAP based on the unpaid amount. Most families who choose the combination do so for liquidity reasons: enough RAD to reduce the ongoing DAP to manageable levels, while retaining cash for other purposes.

RAD amounts vary widely across the sector. Entry-level facilities may have no RAD requirement at all; premium metropolitan aged care accommodation can require deposits above $1,000,000. There is no legislated maximum RAD amount — providers set prices subject to government oversight.

How is the Daily Accommodation Payment rate calculated?

The conversion between RAD and DAP uses the Maximum Permissible Interest Rate (MPIR), set quarterly by the Australian Government and published by the Department of Health, Disability and Ageing (https://www.health.gov.au/resources/publications/base-interest-rate-bir-and-maximum-permissible-interest-rate-mpir-for-residential-aged-care). The current MPIR effective 1 April 2026 to 30 June 2026 is 7.96% per annum (Department of Health, Disability and Ageing). This rate is updated each calendar quarter and changes with movements in the underlying base interest rate, so the current published rate should always be confirmed before quoting a daily figure.

As a worked illustration at the current 7.96% MPIR: a $500,000 RAD produces a DAP of approximately $109 per day ($500,000 × 7.96% ÷ 365). A $1,000,000 RAD produces approximately $218 per day. The MPIR conversion is designed so that neither RAD nor DAP is structurally cheaper than the other — a resident who pays the full RAD gets back a refund that has, in effect, offset the daily rental cost over time. The choice is not about saving money on accommodation costs; it is about the asset structure, liquidity, and the Age Pension means test implications of each option.

How does a RAD affect the Age Pension assets test?

The Age Pension assets-test treatment of the RAD is the single most important driver of the choice for many families. A paid RAD is exempt from the Age Pension assets test — once funds are transferred to the provider, they are no longer assessable financial assets in the resident's hands (industry-standard position; see Aged Care Financial Advisers, https://agedcarefa.com/impact-of-lump-sum-payments-rad-on-age-pension/, current as at 5 May 2026). For residents whose financial-asset levels would otherwise place them in the assets-test taper zone or above, paying a RAD can therefore lift Age Pension entitlement materially.

Conversely, a resident who opts for DAP retains their savings and investments as fully assessable financial assets — the assets continue to count, and deeming continues to apply for income-test purposes. For residents well below the assets-test threshold, the difference between RAD and DAP is smaller because their pension was already at the maximum rate. For residents near the full-pension threshold or in the taper zone, the difference can run to thousands of dollars of pension per year.

A separate but important point: the aged care means-tested care fee (the fee charged by the facility based on the resident's income and assets, calculated under the Aged Care Act framework — Department of Health, Disability and Ageing, https://www.health.gov.au/our-work/residential-aged-care/charging/means-assessment) DOES count the RAD value within its asset-tested component. So the RAD is in different positions under the two frameworks: exempt from the Age Pension assets test, included in the aged care means-tested fee assessment. These are two parallel systems with different rules — coordinated specialist advice is essential.

How is the family home treated for the Age Pension when a resident enters care?

The Age Pension treatment of the family home when a resident enters aged care is one of the most important and commonly misunderstood aspects of the whole framework. Per DSS Social Security Guide 4.6.3.70 (https://guides.dss.gov.au/social-security-guide/4/6/3/70, captured 5 May 2026): "If an income support recipient vacates their principal home to enter a care situation, the home continues to be an EXEMPT asset under the assets test for a 2-year period. This provision applies irrespective of whether an income support recipient intends to return their principal home."

In plain terms: regardless of how long the resident intends to stay in aged care, the family home remains exempt from the Age Pension assets test for the first two years after they enter residential care. During this two-year window, the home's value — whatever it may be — is not counted in the means test. After two years, if the resident has not returned home, they are reclassified as a non-homeowner and the home becomes an assessable asset under the assets test (DSS Guide 4.6.3.70; SSAct s.11A(1)).

Where a spouse or partner continues to live in the home — an illness-separated couple — the home exemption continues indefinitely while the partner remains there. The partner in residence anchors the exemption.

There is also a historical exception: for residents who entered aged care between 1 July 2004 and 31 December 2016, and who are paying (or accruing liability to pay) a Daily Accommodation Payment and renting out their former home, the exemption may continue indefinitely beyond the two years (DSS Guide 4.6.3.70). This affects a specific and dwindling cohort; residents who entered care after 1 January 2017 do not benefit from it.

What happens when you sell the family home to fund a RAD?

Selling the family home to fund a RAD is the most common funding approach in the sector — the family home represents the majority of most retirees' wealth, and the RAD requires the largest amount. Under DSS Guide 4.6.3.70, where a single pensioner sells their home while in a care situation, the sale-proceeds exemption provisions may apply provided the intent is to use the proceeds to purchase a new principal residence — which can include a RAD in a residential aged care service. The proceeds may remain exempt from the assets test for up to 24 months (or up to 36 months in extended cases), subject to deeming at the lower rate for income-test purposes. Where there is a delay between home sale and RAD payment, the proceeds become a financial asset subject to normal deeming — the timing of the sale-to-RAD transition matters.

What is the Accommodation Payment Guarantee Scheme?

RADs are protected by the Australian Government's Accommodation Payment Guarantee Scheme, established under the Aged Care (Bond Security) Levy Act 2006 and administered through My Aged Care (https://www.myagedcare.gov.au/aged-care-home-accommodation-refunds). The Scheme covers all residents of Australian Government-subsidised aged care services who have paid a lump-sum RAD. If an aged care provider becomes bankrupt or insolvent and cannot refund the RAD, the Australian Government guarantees the refund — including any interest due since the resident left care. Since inception in 2006, the Scheme has been activated three times, with the Commonwealth refunding around $19 million in total under the Scheme (Australian National Audit Office, https://www.anao.gov.au/work/performance-audit/protection-residential-aged-care-accommodation-bonds).

For most families this means the risk of provider failure — while worth monitoring for very large deposits at less-established providers — does not alter the fundamental structure of the RAD/DAP decision. The RAD is structurally protected in a way deposits with a private financial institution are not.

When should you choose RAD, DAP, or a combination?

The RAD versus DAP choice is not one-size-fits-all. Three illustrative scenarios:

Helen, 84, single, $720,000 in financial assets and a $850,000 home now being sold. Helen is well above the singles homeowner full-pension assets-test threshold and is receiving a sharply reduced part-pension. The aged care facility's RAD is $550,000. Paying the full RAD from the home-sale proceeds removes $550,000 from her assessable financial assets — lifting her Age Pension entitlement materially. The remaining ~$300,000 of cash is still assessable. Her aged care means-tested fee will reflect the RAD plus remaining cash, but the Age Pension uplift is real. RAD is generally rational.

David, 78, partnered, wife Susan continues to live in their family home. The home is exempt indefinitely as long as Susan lives there (illness-separated provisions; DSS Guide 4.6.3.70). David's separate financial assets are modest at $180,000. The facility's RAD is $480,000 — far more than the family can fund without selling the home, which they do not want to do because Susan still lives there. DAP is the practical choice — the family pays the daily rent from David's investment income and Susan's continued occupancy. The Age Pension assets-test position is dominated by the home exemption, not by the RAD/DAP choice.

Margaret, 81, single, $400,000 cash, $0 home (had been renting). Margaret can afford a partial RAD but not the full $620,000 the facility quotes. A combination payment — say $300,000 RAD plus DAP on the remaining $320,000 — preserves $100,000 of liquidity for incidental costs and reduces the daily DAP to about $70/day at the current MPIR ($320,000 × 7.96% ÷ 365). The partial RAD also reduces her assessable financial assets from $400,000 to $100,000, lifting Age Pension entitlement materially.

These are general-information scenarios only; the right structure for any individual depends on the full picture of assets, the family home position, expected length of stay, and the specific aged care fee assessment that will apply.

How should you approach the RAD versus DAP decision?

A RAD payment is generally appropriate where the resident has accessible assets to fund it, where the Age Pension and aged care fee implications favour the payment, and where the family is comfortable with funds being held by the provider through the duration of care. DAP is generally preferred where the family needs to retain liquidity — for example, where the home is being retained (with a spouse living there) and there is no accessible cash pool for a RAD, where the expected stay is short, or where the upfront payment simply is not possible. The combination approach captures some of the assets-test benefit of the RAD while preserving liquidity. Many families adjust over time, making additional RAD payments to reduce the ongoing DAP as cash flow allows.

Sources

Key takeaways

  • A Refundable Accommodation Deposit (RAD) is a lump sum paid to the aged care provider and refunded when the resident leaves or dies. Once paid, the RAD is exempt from the Age Pension assets test — funds transferred to the provider are no longer assessable in the resident's hands. For residents near the assets-test taper zone, paying a RAD can lift Age Pension entitlement materially.
  • A Daily Accommodation Payment (DAP) is ongoing rent calculated using the Maximum Permissible Interest Rate (MPIR), set quarterly by the Australian Government. At the current MPIR of 7.96% p.a. (effective 1 April 2026 to 30 June 2026), a $500,000 room produces a DAP of approximately $109 per day. Financial assets retained to pay DAP remain fully assessable under the Age Pension means test.
  • The family home is exempt from the Age Pension assets test for the first two years after a resident enters residential aged care — regardless of whether they intend to return. After two years, if the resident has not returned home, the home becomes assessable and the resident is reclassified as a non-homeowner. Where a spouse or partner continues to live in the home, the exemption continues indefinitely.
  • RADs are protected by the Australian Government's Accommodation Payment Guarantee Scheme. If a provider cannot refund the RAD on exit or death, the Commonwealth guarantees the refund including any accrued interest. The Scheme has been activated three times since 2006, with approximately $19 million refunded in total.
  • The aged care means-tested care fee includes the RAD value in its asset assessment — unlike the Age Pension assets test, which excludes the RAD. The two frameworks run in parallel with different rules, making coordinated specialist advice essential when planning the RAD/DAP structure.

Frequently asked questions

What is the difference between a RAD and a DAP in aged care?

A Refundable Accommodation Deposit (RAD) is a lump sum paid upfront to the aged care provider, held during the stay and refunded when the resident leaves or dies. A Daily Accommodation Payment (DAP) is ongoing rent, calculated by applying the Maximum Permissible Interest Rate to the agreed room price. A resident who pays a partial RAD pays DAP only on the unpaid portion of the room price — the two are interchangeable at the agreed total.

Is a RAD exempt from the Age Pension assets test?

Yes. Once a RAD is paid to the provider, the funds are no longer counted as assessable financial assets for the Age Pension means test. This is one of the most important financial consequences of the RAD/DAP choice — for residents in the assets-test taper zone, paying a RAD can increase Age Pension entitlement materially. Financial assets retained to pay DAP remain fully assessable and subject to deeming.

Is the family home counted in the Age Pension means test when someone enters aged care?

The family home is exempt from the Age Pension assets test for the first two years after a resident enters residential aged care, regardless of whether they intend to return. After two years without returning, the resident is reclassified as a non-homeowner and the home becomes assessable. Where a spouse or partner continues to live in the home (an illness-separated couple), the exemption continues indefinitely while the partner remains there.

What happens to a RAD if the aged care provider goes bankrupt?

RADs are protected by the Australian Government's Accommodation Payment Guarantee Scheme. If a provider becomes insolvent and cannot refund the RAD, the Commonwealth guarantees the refund including any accrued interest. This protection has been activated three times since the Scheme's inception in 2006. The RAD is structurally protected in a way an equivalent deposit with a private institution is not — provider failure risk does not fundamentally alter the RAD/DAP decision for most families.

A note on advice. This article is general information only and doesn't account for your personal circumstances. Everyone's situation is different — before acting, it's worth talking it through with a licensed adviser who knows your full picture.