Retirement villages are a popular lifestyle choice but might cost you more than you first think.
Confusion, hidden fees and lengthy legalise are often the hallmark of contracts for retirement villages. Here is John Saunders of The Pittwater Partnership in Sydney with some insights.
Here is what we learned but please listen in as John explains all this much better than we ever could.
To listen while you drive, walk or work, just access the episode through a free podcast app on your mobile phone.
Retirement villages usually consist of so-called independent living units or self-care units. Residents in these units receives no support with daily living.
Some retirement villages might also offer assisted living and serviced apartments, where residents receive some support with daily household tasks.
All units – be it independent or assisted living – fall under the Retirement Villages Act of the relevant state or territory.
While the retirement village doesn’t receive government funding as such, its residents might receive the aged pension or government-funded home care.
What To Focus On
When you review the contract, focus on four things. Determine what type of contract you are signing (what are you buying?), what fees to pay, timing of your departure and what return you receive for your unit.
1 – Type of Contract
You can buy into a retirement village in 5 different ways – the operator decides how this works.
Your interest might be a strata title, so you actually buy the unit. It might be a lease hold, a loan licence arrangement, a licensed company title and less commonly a rental.
Strata titles are not very common anymore. Most new contracts have moved to loan license arrangements. This gives the operator a lot more control. And it might avoid stamp duty that would be due on a strata title sale.
2 – Fees
Most retirement villages charge various fees. It is really important that you research these fees in detail.
There is almost always a deferred management fee which varies from 30% to 35% of the original purchase price or agreed sales value, staggered over 6 to 10 years.
The village will charge a strata fee that covers the usual costs of strata living, cleaning, garden work, repair and maintenance and so on.
There might be a recurring facility fee to cover social facilities and programs. And some villages charge a service fee just for the priviledge of living within the community.
When you leave, you might have to continue paying these fees until the unit is sold and the new tenant starts paying.
But more importantly the village might charge you an exit fee that can be substantial. You also usually have to cover the operator’s legal costs in addition to your own costs (solicitor fees etc).
In addition to these fees, you are usually responsible for electricity, phone and internet usage as well as personal contents insurance. If you receive care and other personal services, these costs are charged on a fee for service basis by the provider.
3 – Timing
Most contracts include a clause that you have to leave when your health deteriorates or you lose your independence. This might limit your options to receive home care within your unit. Once you have paid the final instalment of deferred management fees, the facility has a financial interest to move you on.
The contract often stipulates that if 2 GPs certify your care needs, that you then have to leave. Find out whether you have free choice of doctors or whether the operator chooses the doctors.
4 – Sale of Unit
New retirement villages often agree on a sales price upfront and include a guaranteed sales period. If your unit doesn’t sell during this period, the operator buys your unit and pays you out. This can be crucial when you move into an aged care facility and need the funds to pay the deposit.
Most contracts state that the operator will appoint the sales agent, who is often a related party. However, the Retirement Villages Act in NSW includes a clause that you can sell your unit through an independent sales agent.
The contract should outline how the sale is handled and who receives what share of the capital gain.
It is important to look at the contract to see how the contract deals with all these issues. Terminology often varies from operator to operator, especially around fees.
This is a legal agreement so it is important that you consult a solicitor who is familiar with retirement village contracts.
Timeframes and fees depend on the retirement village itself but also on the legislation of your state or territory.
The contract will also deal with things like parking, cleaning, visitors, pets, mediation and whether you need to renovate the unit after you moved out.
New retirement villages often offer 3 or 4 levels of entry contribution. This allows you to tailor your contribution around your financial needs. Paying a higher deposit upfront for example might allow you to qualify for the aged pension since this deposit is not included in the asset test.
Retirement Living Options
Moving into a retirement village is one option you have as you age. But there are other options as well.
So-called ’55 developments’ are just normal strata-title developments with one exception. All residents must be aged 55 or older. This condition makes it easier for developers to get DA approval. But beyond that such developments are just normal apartment blocks for independent living and receive no government funding.
Mobile Homes and Caravan Parks
These are low-cost forms of retirement leaving and more prevalent further away from Australia’s capital cities. You rent the land and then place your own caravan on the land. While there is no government funding, you might qualify for the aged pension and rent assistance.
And then there is aged care that receives significant government funding subject to asset and income tests. The aged care facility might be on the same campus as the associated retirement village, but operates under the Aged Care Act of your state or territory with different management.
Your Own Home
You could also stay in your own home and receive a Commonwealth Homecare package or a Commonwealth Home Support package. These are subsidised packages from the Commonwealth government and are accessed through Aged Care Assessment Team (ACAT) and on MyGov.
These support packages are also available to you if you live in a over 55 development, a retirement village or a mobile home/caravan park.
So this was a short overview of retirement village contracts. The devil is in the detail, so please review your contract with great attention to detail and play through different scenarios.
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 31 August 2020