By Rachel Lane MFP
If you believed everything you heard about retirement villages lately, it would be easy to conclude that these facilities should be avoided, due to the likely detrimental effects on your financial circumstances and health.
If you are more of a critical thinker or have experience with the industry, you are probably shaking your head. People tell stories of signing contracts they did not understand, not seeking legal or financial advice or worse, receiving advice that did not completely inform them about contracts and costs.
Retirement village contracts are a balance of rights, responsibilities and costs. They can be complicated and advice should be mandatory. Here are some tips and traps on what to expect.
Importantly, if you are their adviser your role is not to ‘weigh the scale’ on the value of the transaction but to highlight the costs, rights and responsibilities and allow clients to make an informed decision.
Watch the Retirement Villages Act
Firstly, retirement villages operate under state (or territory) legislation, typically the Retirement Villages Act, which prescribes what is and is not a retirement village, who can be a resident (typically there is a minimum age of 55) and the legal documents that are required, commonly contracts and disclosure documents. It also regulates some but not all of the financial arrangements. Typically, retirement villages are not allowed to profit from running the village.
Under the contract, the ownership (or right to occupy) a home in a retirement village is often a Leasehold or Licence but in some cases, it is Strata Title or even a company share or unit trust arrangement. Many people have a natural inclination to want a Strata Title because of the rights and control that relate to the ownership model as well as being familiar with an ownership model.
This is a good example of how retirement village contracts can be different from similar transactions and the need to ensure you get the correct balance of rights and responsibilities.
In a strata title village, the perception of ‘ownership’ is probably different to the reality. In most cases the resident may have a copy of the title or may hold the title but with a caveat against it, to restrict sale to people who are not eligible to live in the village and to ensure that the exit fee is paid.
Strata villages certainly give residents a say in the running of the village, as residents are part of the owner’s corporation. But this also comes with the responsibility to keep up this involvement for your entire stay. Just like any other strata complex, owners are responsible for the owner’s corporation fees until their unit sells. In states that have a guaranteed buyback or payment when someone moves into aged care, these often do not apply to a strata title village.
Let’s be clear. I don’t believe strata villages are bad, I am saying that retirement village contracts are different to similar contracts in the ‘real world’ and people need to look past what they think they want and assess the contracts on their merits. The contract should strike the right balance of costs, rights and responsibilities for the individual.
Break down the different costs
To analyse and compare different villages, break the costs of the transaction into three parts: Ingoing, Ongoing and Outgoing.
Ingoing – the amount someone pays for their home (or right to occupy a home) in the village plus transaction costs such as stamp duty or contract preparation fees.
Ongoing – the costs to live in the village, often called the general service charge or recurrent charge. A budget should also be done for personal expenses. In most retirement villages people are levied for utilities, which are individually metered. Then there are everyday expenses such as groceries, maintaining a car, entertainment and travel. In addition, there may be the cost of care through a Home Care Package, private carers or a combination of two.
Outgoing – the amount people pay when they leave the village or the home is sold. The Deferred Management Fee, which is commonly between 25% and 40% of either the purchase price or sales price, is normally the biggest cost. But there can also be a share of capital gain (or loss), reinstatement or refurbishment costs and sales and marketing fees.
Important consequences to consider moving to a retirement village can have wide-ranging consequences on personal finances, so watch the following:
- Impact on pension entitlement and eligibility for rent assistance
- Cost of a Home Care Package.
- Ability to afford living in the community, and
- The amount of money that will be received when the unit is sold or the amount paid under a guaranteed buyback and how quickly this will occur.
These factors will impact the long-term asset position, which affects the cost of the next move, into aged care. Crunching the numbers and understanding rights and responsibilities throughout the transaction can be complicated, but it is essential to ensure there are no surprises later.
If there is a lesson in the current media hype it is this: the right legal and financial advice is valuable for consumers and retirement village operators.
Rachel Lane MFP is Principal of Aged Care Gurus. See www.agedcaregurus.com.au. This article was originally published in Cuffelinks and is general information and does not consider the circumstances of any individual.