Aged Care in 2025: Is paying a large upfront RAD your only option?

As Australians continue to live longer than ever, it’s crucial to start early discussions about aged care. No one likes talking about getting older, but waiting until a parent or loved one has a fall, or loses the capacity to make decisions, can create unnecessary stress and financial pressure.

One of the biggest concerns is how to afford aged care accommodation. With upfront costs sometimes running into millions of dollars, many families feel pressure to sell the family home. However, selling your home is not the only option. Let’s break down the key payment methods available and how to choose the right approach for your family.

Understanding the key Aged Care accommodation costs

When entering residential aged care, the accommodation cost is set by the provider and fixed upon entry. You’ll typically be given three payment options:

1. Refundable Accommodation Deposit (RAD) – the “buy” option.
2. Daily Accommodation Payment (DAP) – the “rent” option.
3. Combination of RAD and DAP – a mix of upfront and daily payments.

Option 1: Refundable Accommodation Deposit (RAD)

The RAD is a lump sum upfront payment for your accommodation. It is Government guaranteed and fully refunded to your estate when you leave or pass away.

Option 2: Daily Accommodation Payment (DAP)

If you don’t want to or can’t pay the full RAD, you can opt to “rent” the room through daily payments. The DAP is calculated using the Government’s Maximum Permissible Interest Rate (MPIR), which is currently 8.42% (effective 1 January 2025).

Example: How It Works

Let’s say you’re looking at a room with a RAD of $1 million.

• Full RAD payment: Pay $1 million upfront.
• Full DAP payment: Rent the room by paying $230.41 per day ($1,000,000 × 8.42% ÷ 365 days).
• Combination: If you can only pay $400,000 as a RAD, you’ll pay DAP on the remaining $600,000:
  $600,000 × 8.42% ÷ 365 = $138.25 per day

Other Aged Care fees to consider

In addition to the RAD or DAP, you’ll also need to budget for:

• Basic daily fee: $63.57 per day (85% of the single rate of the basic Age Pension as of January 2025)
• Means-tested care fee: Based on your assets and income.
• Additional services fees: For any optional extras provided by the facility.

Which strategy should you choose?

A good rule of thumb is to pay as much of the RAD as possible to minimise the DAP. Here’s why:

• The RAD is refundable to your estate.
• The DAP is non-refundable—the interest paid is essentially “lost” once paid.

However, it’s not always straightforward. Consider:

• Cash flow needs: Can you afford daily DAP payments while waiting to sell the family home?
• Health considerations: The average stay in aged care is less than three years. For those entering care on a short-term or palliative basis, it may make sense to minimise upfront payments.

Example strategy

If you have $400,000 available, you could:

1. Use it as a partial RAD to lower your DAP.
2. Use the DAP payments from this amount to buy time before selling the family home.

This flexibility is key to making aged care affordable without panicking to sell assets prematurely.

Every situation is different, and choosing between a RAD, DAP, or a combination of the two can significantly impact your family’s financial future. Our teams specialise in creating tailored aged care strategies, ensuring your loved ones receive the care they need while protecting their legacy.

General Advice Warning: The information provided in this article is general in nature and does not take into account your personal financial situation, objectives, or needs. It is not intended to be financial advice. Before making any decisions based on this information, you should consult with a licensed financial adviser to ensure that it is appropriate for your individual circumstances.