The tips, traps and costs of retirement villages

All / 18.02.2021

The tips, traps and costs of retirement villages

With an aging population, an increasing number of Australians are opting to live in retirement villages. While pitched at the ‘over-55s’, the average age of entry is 75, and average age of residents is 81. Depending on the retirement villages, attractions include having home maintenance issues taken care of, more social contact, access to recreational facilities and on call assistance in case of medical emergency. Moving to a retirement village can also free up capital to support living costs in retirement.

These benefits all come at a cost, of course, and the type and amount of fees can vary enormously from village to village. There are also several different types of ownership or occupation rights or ‘tenure’. Most commonly, residents pay the market price of a unit in exchange for a long-term lease, or pay an upfront fee for a licence to occupy. Straight rental arrangements, often for serviced apartment-style accommodation, are also available in some villages.

Lots of fees

While there are many ways in which retirement villages structure their fees, the most commonly encountered include:

  • Waiting list fees.
  • Ingoing contribution. This may be referred to as a refundable deposit, purchase price or a loan, and will be the largest upfront payment.
  • A regular (e.g. monthly) maintenance fee to cover upkeep of facilities, pay staff and cover a range of services.
  • Personal services fees for things like meals, laundry and personal care.
  • Utilities.
  • Deferred management fee, or departure or exit fee, on leaving the village.
  • A refurbishment fee.
  • Share of any capital gain.

On the other hand, when you leave the village you will receive the proceeds of selling your unit less any exit fees. However, depending on the prevailing market it can be many months before the final payment is received.

Some of these fees can better understood by way of an example.

John and Wendy’s experience

John and Wendy are in their late 70s when they decide to downsize from the family home. They are attracted to the retirement village lifestyle by the recreational facilities and social opportunities, plus the availability of personal care should they require it in the future.

  • They pay $400,000 for the right to occupy a unit. The monthly maintenance fee is $600. Eight years later they both need to move to aged care so need to sell their unit. It is now worth $600,000.
  • Their exit fee (deferred management fee) is 4% of their purchase price for each year of occupancy (capped at 40%). In this case it amounts to 32% of the purchase price, or $128,000.
  • In their village the resident’s share of any capital gains is 50%, so the village operator takes a further $100,000.
  • John and Wendy therefore come away with a total of $372,000 ($600,000 – $128,000 – $100,000).

This is just one simplified example, and even slightly different circumstances can lead to a very different result.

While it may seem a poor result for John and Wendy to pocket less than the purchase price after eight years, the decision to enter a retirement village is more about lifestyle and services rather than just about financial returns.

Centrelink considerations

If your entry contribution is more than the extra allowable amount (the difference between non-home owner and home owner assets test threshold) Centrelink will classify you as a home owner. This applies to most people. Anyone assessed as a non-home owner may be eligible for rent assistance, with the amount based on the ongoing fees.

Major event

Moving house is a major and stressful life event at the best of times. With their varying fees and ownership structures, a move into a retirement village may be even more complicated. That’s no reason to dismiss the idea – many retirement village residents report an increase in their happiness as a result of making the move. However, entering a village has major financial consequences, so talk to your financial advisor about they assistance they may be able to offer you.

For more information or to speak to one of our Financial Advisers please contact TNR Wealth Management on 02 6626 3000.

Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.