Funding aged care from super: lump sum, pension, or combination?

When a retiree moves into residential aged care, one of the most consequential financial decisions is how to fund the costs — and where superannuation fits in that picture. The choice between drawing a lump sum from super to pay a Refundable Accommodation Deposit (RAD), continuing pension drawdown to cover daily costs, or combining both approaches has real implications for the Age Pension, taxes, how long the super lasts, and what eventually passes to the estate. For families going through this transition — often at speed, under emotional pressure — understanding the structure in advance matters.

What do residential aged care costs include?

Residential aged care involves several distinct cost categories. The accommodation cost is the largest single item and can be paid as a RAD (a large lump sum deposited with the facility and fully refunded when the resident leaves or dies), a Daily Accommodation Payment (DAP, a daily fee in lieu of the deposit), or a combination of both. The Basic Daily Fee — set at approximately 85% of the single basic Age Pension rate (Aged Care Act 1997), adjusted periodically — covers basic accommodation and services and applies to all residents. The means-tested care fee is a further daily charge based on a combined assessment of income and assets, subject to annual and lifetime caps. Optional extra service fees apply at some facilities. For most residents, the combined ongoing costs represent a substantial ongoing draw on income and savings, though the exact amount varies significantly by facility, location, and individual financial circumstances.

How does paying a RAD lump sum from super affect tax and the Age Pension?

For retirees who are 60 or over and have met a condition of release, a super lump sum withdrawal is tax-free (Income Tax Assessment Act 1997). Withdrawing from super to pay a RAD does not trigger any personal income tax liability for members in this category. Once the RAD is paid to the facility, it becomes an exempt asset for Age Pension purposes under the Social Security Act 1991 (s.1118), which lists refundable accommodation deposits among the assets excluded from the means test. The practical effect: funds that were previously sitting in a super or bank account — and therefore counted as assessable assets for the pension means test — become an exempt deposit. For retirees whose assessable assets were above the full-pension threshold, this shift can increase the Age Pension entitlement while simultaneously funding the accommodation cost. The RAD is refundable in full (minus any agreed deductions) when the resident exits or passes away, so it typically flows back to the estate.

Can an account-based pension fund ongoing aged care fees?

For the ongoing running costs — Basic Daily Fee, means-tested care fee, and any extras — most residents fund these from regular income: the Age Pension, an account-based pension from super, or a combination. An account-based pension in retirement phase continues to earn investment returns tax-free within the Transfer Balance Cap of $2.0 million (FY2025-26, per the Superannuation Industry (Supervision) Act and ITAA 1997 retirement income provisions). Pension payments are tax-free for members 60 and over drawing from a taxed super fund. The account-based pension balance remains fully assessable under the Age Pension income test (deemed at the standard deeming rates) and assets test. For retirees whose super balance is being preserved for ongoing income rather than drawn as a lump sum for the RAD, the entire balance continues to count as an assessable asset — which is Centrelink-neutral compared to the lump-sum-RAD approach, but does not produce the same assets-test improvement.

How is the former home treated when someone enters residential aged care?

When a person enters residential aged care, their former principal home generally remains exempt from the Age Pension assets test for up to two years under SSAct s.1118(1)(a). If a "protected person" — a partner, a dependent child, or a qualifying carer who has lived in the home for at least two years — continues to reside there, the exemption continues indefinitely. Once the two-year window expires without a protected person in the home, the property becomes an assessable asset for the Age Pension means test. It is important to understand that the former home's value is treated differently for the means-tested care fee: it is included in the means assessment for that fee above certain thresholds, even while the property is exempt for Age Pension purposes. This interaction — same asset, different treatment in two separate tests — is one of the reasons specialist aged care financial advice is strongly recommended before and at the point of entry.

When is a Daily Accommodation Payment better than paying a RAD lump sum?

Rather than drawing a super lump sum for the RAD, a resident can instead elect to pay the DAP — a daily charge equivalent to the interest foregone on the unpaid RAD — and preserve the super balance. This approach keeps the capital invested, continues to generate investment returns, and avoids the upfront capital commitment. The trade-off is that it creates a continuing cash flow obligation, and the preserved super balance remains fully assessable under the Age Pension means test rather than being converted to an exempt deposit. For retirees with moderate super balances who are concerned about depleting capital, or where the full RAD amount would leave insufficient funds for other needs, the DAP route can be appropriate. The right answer depends on the individual's total assets, income, pension position, and expectations about length of stay — which is why modelling both options with current figures is worthwhile.

What are the estate implications of choosing RAD versus DAP?

The choice between RAD and DAP has estate implications. The RAD, being a refundable deposit, flows back to the estate on exit or death (after the facility deducts any agreed amounts). The reduced super balance that funded the RAD is no longer in super and therefore does not form part of the super death benefit — instead it flows through the estate as a refund. Under the DAP approach, the super balance is preserved and the larger remaining balance flows as a super death benefit when the member dies. Super death benefits have their own tax and beneficiary rules, so the pathway matters. For retirees with specific estate intentions — particularly around who receives what and how — the structure should be considered in conjunction with the broader estate plan.

What are the most common ways to fund residential aged care from super?

For a self-funded retiree who sells the family home on entry to care, the typical structure is home sale proceeds funding the RAD and the super pension funding ongoing costs — preserving super for income while the estate retains a refundable deposit. For an Age Pensioner who retains the home (with a partner still in residence), the RAD is more commonly funded from super or a partial RAD from available capital, with the pension and Age Pension covering ongoing fees. For couples where both partners transition to care simultaneously, the home is more often sold to fund both RADs, with super pensions providing ongoing income for each. For residents with modest assets and a full Age Pension, the means-tested care fee is typically low and ongoing costs are largely met from the Age Pension and a modest pension drawdown.

In every case, the specific numbers — the RAD at the particular facility, the individual's assets and income, the couple's combined position, the state of the super account, and the estate intentions — determine which structure produces the best outcome. Pre-entry planning, rather than decisions made under the time pressure of an imminent placement, consistently produces better results.