The Pension Does Not Cover the Bill, and Something Has To
The basic daily fee alone consumes a large share of a full Age Pension by design, and the means-tested care fee and accommodation payment sit on top of it. For most residents the total exceeds their income, and the difference has to come from capital — which makes the question not whether there is a gap but what funds it and in what order.
- The answer: Add the basic daily fee, the means-tested care fee and the accommodation payment, subtract income, and the remainder is what capital has to fund each year.
- The trap: A refundable accommodation deposit can be drawn down to meet the gap, which reduces the refund and converts an exempt asset into an assessable one.
- The recommendation: Model the gap for a five-year stay before committing capital to a deposit. Liquidity for the gap is worth more than the last part of the deposit.
Where the AI summary above gets this wrong
"The Age Pension covers the cost of aged care."
That's surface-true. Here's what it misses:
- The basic daily fee alone takes most of it — It is set as a percentage of the single Age Pension rate and is charged to every resident, before any means-tested care fee or accommodation payment.
- The gap is funded from capital, not from income — For most residents the total fees exceed the pension and any income stream, so the difference is drawn from assets — which changes the means assessment as it happens.
01 What the total bill looks like
Three charges apply to most residents: the basic daily fee, charged to everyone at a percentage of the single Age Pension rate; the means-tested care fee from the income and assets assessment; and an accommodation payment or contribution for the room.
Optional extra service fees can sit on top where the home offers a higher standard. Those are contractual rather than regulated and are the part most worth reading before signing.
Against that, income is the Age Pension plus any account-based pension and other investment income. For a resident on a full pension with a modest balance, the fees exceed the income substantially.
02 Where the gap comes from
Capital is the answer, and the order matters. Drawing from an account-based pension is the usual first step, because it is liquid and the payments are tax-free after 60.
Drawing down a refundable accommodation deposit is permitted and has a cost: it reduces the refund and converts an asset that was exempt from the Age Pension assets test into an assessable one, which reduces the pension — the mechanics are in the RAD and DAP comparison.
Selling the former home is the last resort and frequently the one families reach for first. Where a protected person lives there it is usually the wrong answer, as set out in the former home reference.
Shows: the annual gap between a resident's income and their aged care fees, and what a stay of several years draws from capital. Ignores: the annual and lifetime caps on the means-tested care fee, indexation of both fees and income, and any extra service fees.
03 Why the caps matter here
The means-tested care fee is capped annually and over a lifetime, and once the cap is reached that component stops. The basic daily fee and the accommodation payment continue.
That means the gap narrows over a long stay rather than widening, which is genuinely reassuring and is the opposite of what most families expect. Modelling five years rather than one shows it.
It also means the early years are the expensive ones. Liquidity in the first two or three years is worth more than the last portion of an accommodation deposit, which is the practical conclusion.
Source: My Aged Care — Changes to fees, contributions and accommodation costs
Model five years, not one. The means-tested fee is capped and the family's fear is usually of an unbounded bill, so seeing the total over a realistic stay is genuinely reassuring — and it also shows that the first two years are the expensive ones, which is where the liquidity needs to be.
FAQ
How do I budget for the gap between my income and my aged care costs?
Add the basic daily fee, the means-tested care fee and the accommodation payment, subtract your income, and fund the remainder from capital. The gap narrows over a long stay because the means-tested fee is capped.
What funds the gap?
Usually an account-based pension first, then drawing down a refundable accommodation deposit — which reduces the refund and converts an exempt asset into an assessable one — and only then selling the former home.
Does the bill get worse over a long stay?
The means-tested care fee is capped annually and over a lifetime, so it stops once the cap is reached. The basic daily fee and accommodation payment continue, so the gap narrows rather than widening.
Sources
Regulator references
- My Aged Care — Aged care home costs and fees · My Aged Care · 2026The fees payable in residential aged care and the means-tested component of them.Last verified: 2026-09-07
- My Aged Care — Working out your costs · My Aged Care · 2026How an income and assets assessment converts into what a person actually pays.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.