Aged Care Pension Impact Australia: How Entering Care Affects Your Pension

The Two-Year Home Exemption

When a single homeowner enters permanent residential aged care, the family home remains exempt from the Age Pension assets test for exactly two years from the date of entry. During this window, the resident keeps their homeowner status and their pension is calculated as if the home does not exist as an assessable asset.

On the first day of year three, the exemption ends. If the home is still owned, vacant, and unsold, it becomes assessable at its full net market value — not a capped figure, not a discounted value, the entire amount. For a home worth $800,000 or more in Sydney or Melbourne, this single reclassification will typically reduce the Age Pension to $0.

This is a pension-specific rule. The aged care means test assesses the family home differently — from Day 1, at a capped value of $214,884 (as of March 2026), regardless of market value. There is no two-year grace period for aged care fees, and no increase in aged care fees at the two-year mark.

Separated Due to Illness

When one member of a couple enters residential care, Centrelink reclassifies them as "separated due to illness." This is an automatic change triggered by the residential care entry, and it has two immediate effects:

1. Higher pension rate. Each partner becomes eligible for the single rate of the Age Pension, which is higher per person than the couple rate. As of 20 March 2026, the single pension rate is approximately $1,200.90 per fortnight (including supplements), compared to the couple rate of approximately $905.20 per person per fortnight.

2. Assets split 50/50. Combined assessable assets (excluding the family home if the at-home partner lives in it) are divided equally between both partners for pension purposes — regardless of whose name they are registered in.

This 50/50 split can work for or against the couple. If one partner holds the majority of the financial assets, the split may reduce their assessed assets and increase their pension entitlement. If both partners hold roughly equal assets, the impact is neutral.

Deeming Rates and How They Affect the Pension

The Age Pension income test does not use actual investment returns. Instead, Services Australia applies statutory deeming rates to the total value of financial assets (bank accounts, super, shares, managed funds, term deposits):

• 1.25% on the first $66,800 for singles (or $110,600 combined for couples separated due to illness) — from 1 July 2026.
• 3.25% on everything above that threshold.

This means a resident with $500,000 in financial assets has a deemed income of approximately $14,914 per year — regardless of whether the actual return on those assets is 1% or 8%.

Deemed income is added to any other assessable income (rental income, pension income streams, employment income) and tested against the pension income test thresholds. The result determines whether the resident receives a full, partial, or nil pension.

For the income test free area (the amount of income a single pensioner can earn before the pension starts reducing), the current threshold is approximately $226 per fortnight.

What RAD Payments Do to Pension Eligibility

A Refundable Accommodation Deposit (RAD) paid to an aged care provider is exempt from the Age Pension assets test. This is one of the few genuine planning levers available.

A resident who sells their home for $1 million and pays $700,000 as a RAD has only $300,000 assessed under the pension assets test (plus any other financial assets). Without the RAD, the full $1 million in cash would be assessable, which could eliminate the pension entirely.

However, the RAD is still assessable for aged care means-testing purposes. So while paying a RAD can preserve pension eligibility, it does not reduce aged care fees.

This asymmetry means the RAD-vs-DAP decision has pension implications that go beyond the aged care cost comparison. A resident who chooses to pay entirely via a Daily Accommodation Payment (DAP) keeps all their cash in bank accounts or investments, where it is fully assessable for both pension and aged care purposes.

The Pension Assets Test Thresholds

As of 1 July 2026, the assets test thresholds for a single person are approximately:

• Full pension up to approximately $600,000 in assessable assets (non-homeowner) or $333,000 (homeowner).
• Part pension tapers at $3 per fortnight for every $1,000 in assets above the lower threshold.
• Pension cuts out entirely at approximately $1,000,500 (non-homeowner) or $733,500 (homeowner) — meaning if total assessable assets exceed these figures, no pension is payable.

For a resident who has sold the family home and has $600,000 in cash after paying a RAD, the pension outcome depends on whether those remaining assets exceed the non-homeowner cut-off.

Planning for the Two-Year Cliff

The two-year home exemption creates a predictable planning horizon. Families know exactly when the pension reclassification will hit and can prepare for it:

• If selling the home: timing the sale and RAD payment to preserve pension eligibility through the transition.
• If keeping the home: modelling the pension reduction at year three and ensuring enough liquid assets remain to cover the increased gap between pension and total aged care costs.
• If a family member can move in: if they qualify as a protected person (spouse, eligible carer with 2+ years co-residence, or close relative with 5+ years), the home exemption continues indefinitely for both pension and aged care purposes.

The Paying for Residential Aged Care guide covers the pension interaction in detail, including how to model the two-year cliff, the RAD pension exemption, and the separated-due-to-illness asset split.

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