Making Sense of Retirement Village Contracts
Making the move to a retirement village can be both exciting and daunting. The exciting part is normally around the ability to free up time and money to enjoy more of your favourite pastimes. The daunting part is typically around the financial arrangements.
The greatest cause of confusion is normally the exit fee, which is often seen as a “rip off.” But the exit fee is directly related to the purchase price, typically the less you pay upfront the more you pay at the end and vice versa. Where there is only one price it makes crunching the numbers easier but the odds of getting the most affordable option for you is less likely.
Growing List of Industry Options
In recent times, retirement villages have been offering a wider variety of payment options, you can find anything from 100% to no exit fee in the market. Of course, you may also be comparing different properties within a village or a property or properties across multiple villages. Weighing up the right option for you will include your ability to pay the purchase price, how much money you need to invest or spend, the impact on your Age Pension and other benefits, your eligibility for rent assistance, your anticipated future capital needs (e.g., to fund a move to aged care), and how long you expect to stay in the village.
With all these variables, trying to decide the best contract option for you can be a daunting task, but let’s take a real example to try to understand the alternatives and numbers you should be considering. Aveo’s contract options are some of the simpler ones to understand – basically you can choose whether to pay your management fee now, later or not at all. Other operators will have different contract names and terms
A Worked Example
The contracts are called “Now”, “Later” and “Bond” and there are a number of financial terms standard across all of the contracts: the management fees are based on the purchase price, there is no sharing in capital gain or loss and there are no marketing fees, sales commissions or renovation costs. There is also a 6 month move in guarantee, which means that if you move into the village and move out within the first 6 months, they give you your money back.
Under the Later option you pay the lowest price upfront with a 35% Deferred Management Fee at the end and get a buyback guarantee of 6 months.
The Now option lets you pay a management fee of 20% now instead of 35% later. The fee is amortised over 2 years so if you only live in the village for a year then 5% is refunded to you. Just like the Later option, there is a 6-month buyback guarantee.
The Bond option increases the purchase price by 40% and also has an establishment fee of 3%, which is not refundable. Under this contract you get your purchase price back with a buyback guarantee of 3 months.
Let’s Look at an Example
Pam is downsizing to an Aveo village, she has a home worth $800,000, $200,000 in her investments and personal assets worth $20,000. Pam currently gets and Age Pension of $1,097 per fortnight.
Pam is moving into an Aveo village where the 2-bedroom apartment she is looking at has 3 prices:
- $500,000 if she pays the management fee later
- $600,000 if she pays the management fee now or
- $721,000 if she chooses the bond contract
Let’s look at what those payment options mean for Pam:
Varying Impact of Different Contract Types
As you can see, the different contracts affect not just what you will pay to the village (and when) but how it can affect the amount of money you will have available to invest or spend, the effect on your Age Pension and other entitlements and how much you will get back (and how soon) after you leave. The simplest way to crunch the numbers is to ask for a Village Guru report from the retirement community. The report will show you the village costs together with an estimate of your Age Pension and Rent Assistance entitlements together with your Home Care Package fees and funding (if applicable). The report can show you how the numbers stack up for different payment options, different properties or different villages side-by-side.
If your chosen village doesn’t offer a Village Guru report, you’ll need to undertake your own financial analysis. Breaking it down into what you pay upfront, while you live there and when you leave can help to make sure you understand what it costs. Don’t rely on simplistic rules of thumb, such as comparing your home value to your new home purchase costs. While a Village Guru Report can give you great information, it’s not advice and you should seek advice from an accredited Retirement Living and Aged Care Specialist adviser.
Courtesy Rachel Lane
Rachel Lane is the creator of Village Guru, a software programme designed to take the financial confusion out of downsizing. She writes regular columns on retirement living and aged care for the Sydney Morning Herald, Melbourne’s Age and the Brisbane Times and regularly speaks on TV and Radio. She has co-authored a number of books, including the Best Seller Aged Care, Who Cares? and Downsizing Made Simple.