Understanding the fees associated with retirement villages


Retirement village

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 village, attractions include having home maintenance taken care of, more social contact  and new friendships, access to recreational facilities and on-call assistance in case of medical emergency. Downsizing 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.

Understanding 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.
When you leave the village you will receive the proceeds of selling your unit less  any exit fees. It’s worth understanding the selling process when considering your retirement village options as this can vary between being able to sell your unit via a real estate agent of your choice and having the village control the sales process by selling it themselves.
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 retains 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 at first glance this  may seem a poor result for John and Wendy to pocket less than the purchase price after eight years, however the decision to enter a retirement village is more about lifestyle and services rather than just about financial returns.

Centrelink considerations

Consideration needs to be given as to whether Centrelink will classify you as a home owner or non-home owner, and whether you may be eligible for rent assistance.  This rent assistance can be helpful in offsetting the cost of monthly due paid for facilities.  Centrelink can be very complex so please contact your financial adviser who can help you understand your circumstances and rent assistance eligibility.

Getting support for this major life 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 adviser about the  assistance they may be able to offer you.
This information and any advice in this website is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. It does not represent legal, property, tax, credit or personal financial advice and should not be relied on as such. You should obtain advice relevant to your circumstances before making decisions in relation to any matters discussed. You should obtain and consider the Product Disclosure Statement for any product discussed before making a decision to acquire that product. The case studies are hypothetical, for illustration purposes only and are not based on actual returns. You should seek specialist advice from a tax professional to confirm the impact of any advice on your overall personal tax position. Taxation information is based on our interpretation of the relevant laws as applied at the date of this communication. Nothing in this website represents an offer or solicitation in relation to property, securities, investments, financial services or credit in any jurisdiction. While every care has been taken in the preparation of this information, it may not remain current after the date of publication and Infocus Advisory and its related bodies corporate make no representation as to its accuracy or completeness.