Understanding One of the Biggest Financial Decisions in Aged Care
For many Australians entering residential aged care, one of the first questions is:
Should I pay a Refundable Accommodation Deposit (RAD) or a Daily Accommodation Payment (DAP)?
The answer can have a significant impact on your retirement savings, investment portfolio, Age Pension entitlements and the amount ultimately left to your beneficiaries. These decisions are often best considered as part of a broader retirement planning strategy.
Unfortunately, there is no one-size-fits-all solution.
For some families, paying a full RAD makes sense. For others, retaining investments and paying a DAP may produce a better outcome. In many cases, the optimal strategy lies somewhere in between.
Understanding how these options work is essential before making a decision.
What Is a RAD?
A Refundable Accommodation Deposit (RAD) is effectively a lump sum payment made to an aged care provider for accommodation.
Think of it as an interest-free deposit.
The key feature is that the RAD is generally refunded within 14 days when the resident leaves the facility or passes away, and is otherwise fully refundable subject to any agreed deductions permitted under the aged care rules, including any permitted retention amounts. For residents entering care from 1 November 2025, providers can deduct a 2% annual retention from the rad balance under the new rules.
Example
Margaret enters residential aged care and the facility has a room price of $600,000.
She pays the entire $600,000 as a RAD.
As a result:
No accommodation interest charges apply.
Her ongoing aged care fees still apply.
The remaining RAD balance is generally refundable to her estate when she leaves care, which can be important for family members.
Many families find comfort knowing the capital remains an asset of the resident rather than an expense. The decision can also have a meaningful impact on long-term retirement income and estate planning outcomes.
What Is a DAP?
A Daily Accommodation Payment (DAP) allows you to pay for accommodation through ongoing daily payments instead of providing a lump sum RAD.
The DAP is calculated using the room price and the government’s Maximum Permissible Interest Rate (MPIR), which was 7.96% per annum as of 1 April 2026.
Put simply, the DAP is the interest charge on an unpaid RAD.
Example
Assume:
Room price: $600,000
MPIR: 7.96%
The annual accommodation cost would be approximately:
$600,000 × 7.96% = $47,760 per year
This equates to approximately:
$130.85 per day
In this scenario:
No lump sum RAD is paid.
The resident retains their capital.
The daily payment applies when no RAD is paid upfront and continues for as long as they remain in care.
What Is a Partial RAD?
Many people don’t realise there is a third option.
You can pay part of the accommodation cost as a RAD and the remainder as a DAP.
This is often referred to as a partial RAD strategy.
Example
Room price: $600,000
RAD paid: $300,000
Remaining unpaid accommodation amount: $300,000 (this unpaid RAD amount is used to calculate the DAP)
If the MPIR is 8%, the DAP is calculated only on the remaining $300,000.
Annual DAP:
$300,000 × 8% = $24,000
Approximately:
$65.75 per day
This approach can provide a balance between reducing ongoing costs while preserving some investment capital.
Full RAD vs DAP: The Pros and Cons
Full RAD
Advantages
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No accommodation interest charges.
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Capital is generally refundable.
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For age pension purposes, a paid RAD is usually treated as an exempt asset, which may improve age pension entitlement.
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Simpler ongoing cash flow.
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Can reduce ongoing financial pressure.
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Provides certainty around accommodation costs.
Disadvantages
Requires a significant upfront payment, although residents generally need to preserve a minimum assets amount of $64,500 per person rather than commit every available dollar to a RAD.
May require selling investments.
Could reduce liquidity and create an opportunity cost if capital is tied up in a lump sum RAD instead of being available elsewhere.
May reduce flexibility for future expenses.
DAP
Advantages
Retain investments and capital. Paying a daily amount instead of a lump sum can help you preserve other assets and keep more flexibility in how your money is managed.
Greater flexibility. DAP can be a better fit for personal circumstances where access to cash matters more than paying a large upfront amount.
Avoid selling assets during unfavourable market conditions. If markets are down, DAP may allow you to delay selling investments or property at a loss.
Preserve funds for emergencies. Keeping more money on hand can provide a buffer for unexpected expenses, medical costs or changes in care needs.
Disadvantages
Ongoing accommodation fees can affect your cash flow.
DAP costs can be substantial, and the daily rate may change over time because DAP indexation increases periodically.
Total payments over time may exceed investment returns.
Cash flow management becomes important.
When a Full RAD May Make Sense
A full RAD often becomes attractive for residential care or aged care accommodation when:
Cash is available.
Investments are earning less than the MPIR.
The family wants simplicity.
The resident has substantial surplus assets.
Example
Peter has:
$800,000 in cash.
Minimal investment returns.
No desire to actively manage investments.
Paying a $600,000 RAD eliminates accommodation interest costs and simplifies his financial affairs. For retirees seeking simplicity, preserving predictable retirement cash flow can often be just as important as maximising returns.
When a DAP May Make Sense
A DAP strategy may be worth considering when the choice aligns with the resident’s personal circumstances and expected length of stay in residential care:
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Investments are generating strong returns. The decision should also consider how investment strategy may change throughout retirement.
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Selling assets would trigger capital gains tax.
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Liquidity is important.
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Estate planning objectives favour retaining capital.
Example
Susan owns a diversified investment portfolio earning approximately 9% per annum.
If the MPIR is 8%, retaining investments and paying the DAP may produce a better financial outcome.
However, the actual result depends on investment performance and risk.
The Investment Return Question
One of the most important comparisons is:
Can your investments reliably earn more than the MPIR?
You should also weigh the opportunity cost of tying capital up in a lump sum RAD.
If your investments are expected to earn:
Less than the MPIR → a RAD may be attractive.
More than the MPIR → retaining investments may be worth considering.
However, this is not simply a mathematics exercise.
Investment risk must also be considered.
A guaranteed saving from avoiding DAP charges is often very different from an investment return that is uncertain.
What About the Family Home?
The family home frequently becomes one of the largest considerations when funding aged care.
Questions often include:
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Should the home be sold?
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Should it be retained?
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Should it be rented?
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How does it affect Age Pension entitlements? For some retirees, decisions around the family home also affect broader retirement affordability.
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How does it affect aged care means testing?
Its treatment depends on whether a protected person, such as a spouse remains living there. If that applies, the home may stay an exempt asset, while other assets are still considered in the assessment.
The answers depend on each family’s circumstances and should not be considered in isolation from the RAD versus DAP decision.
How RAD and DAP Affect Your Estate
Many families focus on the impact aged care may have on the inheritance they leave behind.
A RAD generally remains an asset of the resident, and the remaining rad balance is refundable to the estate.
By contrast, a daily payment is an ongoing expense and is not recoverable like a refundable lump sum, which can matter for estate planning.
Example
Two residents enter identical facilities.
Resident A pays a $600,000 RAD.
Resident B pays a DAP of approximately $48,000 per year.
After five years:
Resident A’s estate may still include the refundable RAD.
Resident B may have paid approximately $240,000 in accommodation costs.
This highlights why the decision can significantly impact long-term wealth preservation. Many families underestimate how aged care decisions can influence future inheritances and intergenerational wealth transfer.
Why Professional Advice Matters
It can affect:
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Investment strategies
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Tax outcomes
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Estate planning
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Cash flow
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Family wealth transfer
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overall aged care costs
The optimal solution often requires balancing several competing objectives, including the accommodation price and other fees.
What appears financially superior on paper may not align with a family’s broader goals or risk tolerance.
Frequently Asked Questions
What is the difference between a RAD and a DAP?
A RAD is a refundable lump sum accommodation payment. A DAP is an ongoing daily accommodation payment calculated using the government’s Maximum Permissible Interest Rate. In residential aged care, the resident pays either a RAD, a DAP, or a combination of both for accommodation fees.
Is a RAD refundable?
Generally, yes. The RAD is generally refunded within 14 days when the resident leaves care or passes away, subject to any permitted deductions under the rules. From 1 November 2025, retention amounts may reduce the refunded rad balance for eligible new entrants.
Can I pay part RAD and part DAP?
Yes. Many residents use a partial RAD strategy to balance liquidity and ongoing costs.
Is it better to pay a full RAD?
It depends on your circumstances, available assets, investment returns, cash flow requirements and estate planning objectives. Whether a full RAD is better depends on liquidity, expected length of stay, Age Pension implications, and personal circumstances.
How is a DAP calculated?
The DAP is calculated by multiplying the unpaid accommodation amount by the government’s Maximum Permissible Interest Rate (MPIR).
Should I sell my home to pay a RAD?
Not necessarily, The answer often depends on your retirement income needs, Age Pension position and future aged care costs. The decision should consider Age Pension impacts, investment returns, family circumstances and broader financial objectives.
Does a RAD reduce Age Pension entitlements?
Potentially. The interaction between aged care and Centrelink rules can be complex and should be reviewed carefully, because paying a RAD can in some cases improve age pension entitlement as it is generally exempt from the assets test for age pension purposes. However, the aged care means-tested care fee is assessed separately through an assets and income assessment, so both sets of rules still need review.
What happens to the RAD when I die?
The RAD is generally refunded to your estate, with the remaining rad balance distributed according to your Will or estate arrangements. This can be an important issue for family members managing estate administration.
Can I change from a DAP to a RAD later?
In many cases, yes. Residents can often make additional RAD payments during their time in care.
What is the best option for most retirees?
There is no universal answer. The most appropriate strategy depends on your personal circumstances, liquidity, expected investment returns, possible Age Pension effects, expected time in care, assets, income needs and family goals.
Final Thoughts
Choosing between a RAD and a DAP is one of the most significant financial decisions many retirees and their families will make.
While the choice appears straightforward on the surface, the implications can extend far beyond accommodation costs.
The decision may affect your retirement income, investment strategy, Centrelink entitlements and the legacy you leave to future generations, particularly where aged care assessments differ from taxable income and Services Australia reviews your position. Professional retirement advice can help families evaluate these trade-offs before committing to a funding strategy.
For some families, a full RAD provides certainty and simplicity. For others, retaining assets and paying a DAP offers greater flexibility. In many cases, a partial RAD strategy provides the best of both worlds.
The key is understanding the trade-offs before making a decision.
At Money Path, we help retirees and families navigate broader residential care funding decisions, including accommodation contribution and means tested care fee issues where relevant, alongside Centrelink rules, retirement planning and estate planning to support lifestyle goals and long-term financial security.
