Imagine you’ve worked hard, paid off a $2.5 million home, and built a $1.3 million nest egg. You’ve never touched Centrelink. You consider yourself fully self-funded.
Then, life happens. One partner needs residential aged care.
The aged care provider asks for a $1,000,000 Refundable Accommodation Deposit (RAD) to secure the room. You look at your $1.3 million in savings and panic. If you pay the million dollars, you’ll be left with just $300,000.
But here is the catch: marketing says it’s free, the math says it’s not.
What most self-funded retirees don't realize is that entering aged care triggers a massive change in how both Centrelink and the Department of Health assess your wealth. By paying that $1 million RAD, you don't just secure a room—you trigger a financial chain reaction that can unlock $62,447 per year in government support and protect your estate from being eaten alive.
Here is how the math works.
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The Initial Position: Self-Funded and Bleeding Cash
In our example, Mum (75) stays in the family home, and Dad (75) enters care.
As a couple, their combined financial assets are $1.3 million. Because this is well above the homeowner couple Age Pension cutoff of $1,084,967, they receive $0 in Age Pension.
If they decide to keep their $1.3 million in the bank and pay for Dad's care using a daily interest payment (the Daily Accommodation Payment or DAP):
- The DAP Bill: At the current 7.96% MPIR, Dad’s daily accommodation payment is $218.08/day ($79,600/yr).
- Care Fees: Dad pays the Basic Daily Fee of $66.80/day ($24,382/yr) and a Means-Tested Care Fee of $48.22/day ($17,600/yr).
- Total Cost: Dad's care alone costs $333.10/day ($121,582/yr).
When you add Mum’s $30,000 living expenses, the household needs $151,582 a year.
Even if their $1.3 million cash earns a decent 4.35% yield ($56,550/yr), they face a yearly cash flow deficit of -$95,032. They will run out of cash in less than three years.
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The Turn: The Pension Paradox
Now, look at what happens if they pay the $1,000,000 RAD in cash.
First, their liquid savings drop to $300,000.
Second, the $1,000,000 paid into the RAD is fully exempt from the Age Pension assets test.
Third, because they are now separated by illness, Centrelink assesses them as two single people.
Suddenly, their assessable assets for the pension are just $300,000 in cash plus $25,000 in personal assets. This is well below the pension threshold.
Almost overnight, Mum and Dad go from $0 in pension to receiving the full single-rate Age Pension of $1,200.90 per fortnight each ($2,401.80/fn combined). Their pension goes from $0 to $62,447 per year in tax-free cash flow.
Securing the Rest: The Home Equity Access Scheme
Paying the RAD also eliminates the $79,600 daily interest bill. Dad’s care fees drop to $80,084 per year (which includes a premium $50 daily service fee).
Between their new $62,447 pension and $13,050 in investment yield on their remaining $300,000, their household income is $75,497.
The annual cash flow deficit has shrunk from a terrifying -$103,134 to a tiny -$4,587.
To cover this gap without touching their remaining $300,000 cash buffer, the couple turns on the Home Equity Access Scheme (HEAS). Because they now receive the full Age Pension, the HEAS allows them to borrow up to $31,223 a year at a low 3.95% p.a. interest rate secured against their $2.5 million home.
They draw just $4,587 a year from the HEAS to wipe out the care fee deficit, leaving them with over $26,000 in unused HEAS cash flow headroom to cover Mum's living expenses at home.
Here is the ultimate paradox: even with the HEAS loan compounding and the new 2% annual RAD retention ($20,000/yr under the new rules), a conservative 4% property growth on their home (+$100,000/yr) means the family’s net estate value actually increases by $67,254 in the first year alone.
Mum’s cash reserves remain completely untouched, Dad is in top-tier care, and the family wealth is protected.
Final Assessment: Act Decisively
Aged care transitions are emotional, fast-moving, and expensive. If you rely on gut feel or outdated advice, you risk burning hundreds of thousands of dollars in unnecessary daily fees. The difference between bleeding cash and building estate wealth comes down to understanding the interaction between the RAD, the illness-separated pension, and the Home Equity Access Scheme.
Stop guessing. Model your exact scenario and check your real position in the Later Life Advice app today.
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[Source: Services Australia, Aged Care Act 2024 Reforms]