How to Plan for Aged Care Costs in Australia

Australia's aged care system provides subsidised care for older Australians through two primary pathways: home care (support services provided in your own home) and residential aged care (living in an aged care facility). Both pathways involve means-testing that determines how much the individual contributes to their care costs. The system underwent significant reform from 1 July 2014 and further reforms are ongoing under the aged care royal commission recommendations.

• Home Care Packages (HCP): Four levels of government-subsidised care provided in the home - Level 1 (basic, ~$9,304/year government subsidy) to Level 4 (high, ~$56,270/year). Wait times for higher-level packages can be substantial. An income-tested care fee applies (up to $14,106/year for full fee payers in 2024-25). No asset test for home care - only income is tested.
• Commonwealth Home Support Programme (CHSP): Entry-level support for people with basic care needs - meals, transport, domestic assistance, personal care. Lower-intensity than HCP. Cost sharing applies but is generally modest.
• Residential Aged Care: Full-time accommodation and care in an aged care facility. Costs include: (1) a basic daily fee (set at 85% of the single age pension rate - approximately $61.96/day in 2024-25); (2) an accommodation cost (RAD or DAP or combination); (3) a means-tested care fee; (4) optional additional services fees for extra amenities. The means-tested care fee is assessed on both income and assets - unlike home care, which is income-tested only.
• Aged Care Quality and Safety Commission: Regulates residential facilities. Check the My Aged Care website (myagedcare.gov.au) for facility star ratings, accreditation status, and reported incidents before choosing a facility.

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Residential aged care accommodation is priced by each facility within maximum amounts set by the government. Residents choose how to pay for accommodation - as a lump sum (Refundable Accommodation Deposit), a daily rental (Daily Accommodation Payment), or a combination.

• Refundable Accommodation Deposit (RAD): A lump-sum payment to the aged care facility. The RAD is fully refundable on departure (to the resident or their estate) - it is not a fee, it is a deposit. RADs for metropolitan facilities in major cities typically range from $400,000 to $1,000,000+ for desirable facilities. The facility holds the RAD interest-free and uses it as working capital - this is the 'cost' to the resident (foregone investment return).
• Daily Accommodation Payment (DAP): Instead of paying a RAD, the resident pays a daily rental charge - calculated as the RAD amount × the MPIR (Maximum Permissible Interest Rate) ÷ 365. The MPIR is set quarterly by the government - as at mid-2025 it is approximately 8.38% per annum. On a $500,000 room, the DAP is approximately $114.79/day ($41,898/year). DAP payments are NOT refunded - they are a genuine cost.
• Combination payment: Residents can pay part RAD and part DAP. Example: $300,000 RAD (reducing the notional $500,000 room to $200,000 outstanding), plus DAP on the remaining $200,000 ($200,000 × 8.38% ÷ 365 = $45.92/day). This reduces the cash required upfront while keeping daily costs manageable.
• RAD or DAP - the financial decision: Paying a full RAD makes sense when: the resident has substantial liquid assets, they can fund the RAD without disrupting other income-producing assets, and the DAP rate (MPIR) exceeds after-tax returns on their investment portfolio. Paying DAP makes sense when: liquid assets are limited, the money can earn more than the MPIR in a diversified portfolio, or the resident does not expect a long stay and wants to preserve capital for estate purposes.
• RAD exempt from Age Pension assets test: While the resident is in aged care, the RAD is exempt from the Age Pension assets test (it is not counted as an assessable asset). This can improve the resident's Age Pension entitlement compared to holding the equivalent amount in financial assets.

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The means-tested care fee is the most financially significant and complex component of residential aged care costs. It depends on both income and assets - and the treatment of the family home is a critical variable.

• Means-tested care fee cap: The means-tested care fee is capped at approximately $32,718/year (annual cap) and $78,524 over a lifetime (lifetime cap) as at 2024-25 - indexed annually. Once the cap is reached, no further means-tested care fee is payable for that resident.
• The family home - partially exempt: The family home is exempt from the aged care means assessment for 2 years if: a spouse/partner continues to live in the home; OR a carer who has lived in the home for at least 2 years and who would be eligible for an income support payment continues to live there; OR a dependent child lives in the home. After 2 years (or if none of these conditions apply), the home is included in the means assessment - up to a capped value of approximately $201,231 (2024-25, indexed) regardless of actual value.
• The home capped value - a significant concession: Even when the home IS included in the means assessment, only the capped value ($201,231) is counted - not the full market value. A $1.5M family home contributes the same to the means assessment as a $300,000 home (both capped at $201,231). This makes retaining the home (rather than selling) financially attractive for means assessment purposes.
• Selling vs retaining the family home: Selling the home and using proceeds to pay a RAD converts an asset with a capped means assessment value ($201,231) into cash that is fully assessed at its actual value. A $1.5M home sale generates $1.5M in assessed financial assets - potentially increasing the means-tested care fee significantly. This does not mean selling is always wrong - it depends on the resident's cash flow needs, estate planning objectives, and whether the Age Pension entitlement impact is acceptable.
• Rental income from the retained home: If the family home is retained and rented out, the rental income is assessable for both the income test (age pension) and the aged care means assessment. This must be factored into the financial analysis.

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Aged care financial planning is one of the most complex areas of Australian personal finance - it intersects superannuation, age pension, estate planning, and residential property in ways that require specialist expertise. Decisions made at the point of entry to aged care can have lasting financial consequences for both the resident and their family.

• Specialist aged care financial advisers: Not all financial advisers have specialist aged care expertise. Look for advisers who hold the Accredited Aged Care Professional (AACP) designation or who can demonstrate specific experience modelling aged care scenarios. The My Aged Care website and the Financial Planning Association's 'Find a Planner' tool can identify aged care specialists.
• Model the scenarios before entry: The financial decision (RAD vs DAP vs combination, sell vs retain the home) depends on: the facility's room price, the current MPIR, the resident's income and assets, their age pension entitlement, estate objectives, and life expectancy. Modelling these scenarios with an adviser before entry prevents reactive decisions under pressure.
• Powers of Attorney are essential: Aged care entry often occurs when the resident has reduced cognitive capacity. A valid Enduring Power of Attorney (financial) is essential so family members can legally act on the resident's behalf for financial decisions - signing the Residential Aged Care Agreement, negotiating the RAD, and managing ongoing finances. Without an EPOA, an application to the Administrative Appeals Tribunal or state tribunal is required - slow, expensive, and distressing.
• Centrelink notification requirements: Entering residential aged care, selling the family home, or receiving a RAD refund are all events that must be notified to Services Australia within 14 days. Failure to notify can result in overpayment of Age Pension that must be repaid, with interest.
• Plan early - before the crisis: Aged care planning is most effective when done 5–10 years before care is likely to be needed. Decisions made in a crisis - when a parent has had a fall, a diagnosis has been made, and the family is under stress - are rarely optimal. Conversations about aged care preferences, finances, and estate wishes should happen while everyone has capacity.

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