Table of Contents

The Refundable Accommodation Deposit (RAD) is a lump-sum payment made to an aged care provider to secure accommodation within an aged care facility. It is government-guaranteed and returned in full when the resident leaves the facility or passes away, minus any agreed deductions. The RAD effectively replaces the former concept of an accommodation bond, but with a more transparent structure and refundable guarantee. Paying a RAD is a significant financial decision, and many families ask, “Is It Better to Pay RAD from Cash or Investment Proceeds?” The choice of funding—whether from liquid cash reserves or proceeds from investments—has wide-reaching implications for aged care fees, Centrelink entitlements, and overall wealth preservation.

Evaluating the Immediate Liquidity of Cash

Using cash reserves to fund the RAD offers immediacy and simplicity. Cash payments do not require the sale of assets, avoiding potential delays or transactional costs. This route often appeals to individuals who have significant funds held in savings, term deposits, or low-risk bank accounts. It also eliminates market timing risks, such as having to sell shares during a market downturn. However, deploying cash in a lump sum may compromise liquidity for future aged care or medical needs, limiting the ability to respond to unexpected expenses or changes in care requirements.

The Opportunity Cost of Using Cash

While using cash is straightforward, the opportunity cost can be substantial. Cash holdings typically earn minimal interest, particularly in a low-rate environment. Once transferred to the aged care facility as a RAD, that capital ceases to generate investment income unless the facility pays a government-mandated interest on unoccupied RADs, which is rare in practice. For individuals with carefully constructed income-generating portfolios, the decision to remove capital from cash and deposit it into a non-earning RAD must consider the long-term impact on passive income streams.

Selling Investment Assets to Fund RAD

Funding the RAD through the sale of investment assets—such as shares, managed funds, or property—may be a more strategic approach for some families. This method can allow for the preservation of liquid cash while using capital from higher-performing or more volatile assets. However, this strategy is not without its pitfalls. Selling investments can trigger Capital Gains Tax (CGT) liabilities, especially if assets have appreciated over time. Timing the market to maximise sale value also adds complexity and uncertainty, which may delay RAD payment.

The Role of Capital Gains Tax in the Decision

CGT can materially impact the net proceeds from selling investments to fund a RAD. Assets held for more than 12 months may benefit from a 50% CGT discount, but tax liabilities still need to be carefully modelled. For retirees, selling assets may result in a temporary spike in assessable income, influencing their age pension entitlements and tax obligations. Strategic tax planning can help mitigate these effects, but it requires forward-thinking advice to avoid unintended financial consequences.

Assessing the Impact on Age Pension Entitlements

Centrelink treatment of financial resources varies significantly depending on how the RAD is funded. Cash used to pay a RAD is exempt from the assets test, thereby potentially improving Age Pension eligibility. In contrast, investment assets remaining on the books are assessable under both the assets and income tests. Reducing assessable assets by paying a RAD can therefore increase pension entitlements or reduce means-tested aged care fees. However, this benefit must be weighed against the income lost by surrendering productive investments.

Cash Flow Considerations and Ongoing Fees

Aged care residents are subject to a range of ongoing fees, including the basic daily care fee, means-tested care fee, and possibly additional services fees. Funding the RAD from cash may limit residual funds available for these ongoing costs. Conversely, if investments are preserved and continue generating income, residents may have a more sustainable means of covering these fees over the long term. This trade-off between capital preservation and ongoing affordability is central to the RAD funding decision.

Market Volatility and Asset Depletion Risks

Using investments to fund a RAD exposes families to the risk of having to sell during market downturns. In volatile conditions, asset values can fluctuate significantly, potentially eroding capital and triggering distressed sales. For families with a preference for capital stability, holding investments for longer periods to ride out volatility may be more prudent. In such cases, using cash for RAD payments can help avoid crystallising losses while allowing for long-term recovery of investment portfolios.

Emotional and Psychological Dimensions of Selling Investments

Selling long-held investments often carries emotional weight, particularly if those assets are tied to family history or a legacy strategy. Property, in particular, may have sentimental value and be seen as an inheritance vehicle. These psychological factors can complicate purely financial decision-making. Paying a RAD from cash may feel less intrusive, preserving the investment structure and emotional ties to assets. Financial advisers must navigate these subjective factors with sensitivity and strategic insight.

Preserving the Estate for Beneficiaries

From an estate planning perspective, the RAD is fully refundable and not subject to CGT, meaning the capital can return intact to the estate. However, if cash is used to pay the RAD, it may reduce the residual value of the estate compared to retaining growth-oriented investments. On the other hand, selling investment assets may reduce the potential for capital growth but preserve cash reserves for distribution. Balancing the goals of care affordability and intergenerational wealth transfer requires nuanced planning.

Flexibility and Reversibility of Funding Choices

RAD payments are not a one-way decision. If circumstances change, part of the RAD can be converted into a Daily Accommodation Payment (DAP), restoring liquidity. This can provide a safety valve for residents who initially paid the RAD from cash but later face cash flow shortfalls. Similarly, if investments are sold prematurely, it may be difficult or costly to rebuild a diversified portfolio. Structuring RAD funding to allow future flexibility is a cornerstone of sound financial advice.

Strategic Blending of Cash and Investment Proceeds

In many cases, the optimal solution is not binary. A blended strategy—partially funding the RAD with cash and partially with investment proceeds—can achieve both liquidity and income sustainability. This tailored approach allows residents to retain enough cash for immediate needs while preserving investment capital for long-term growth or income. It also offers scope for tax efficiency and pension optimisation. A financial adviser with expertise in aged care planning can model various scenarios to determine the most balanced outcome.

Importance of Professional Financial Advice

Navigating the funding of a RAD requires far more than a surface-level financial analysis. It involves taxation, Centrelink implications, estate considerations, and the long-term sustainability of cash flow. With rules changing frequently and each client’s financial landscape being unique, personalised advice from an accredited aged care specialist is essential. Families are best served when decisions are made through the lens of strategic financial planning, rather than reactive asset liquidation.