Retirement villages and residential parks: How to maintain the pension
| Are you or a loved one considering moving to a retirement village or residential park? | |
| Do you need information about how the sale of an existing property will impact the pension? | |
| Do you need help understanding the payment options? |
Julie Lockeridge – Accredited Aged Care Adviser
What to consider when moving?
Julie Lockeridge – Accredited Aged Care Adviser
If you or a loved one is planning to move into a retirement village or residential park, you might be given the option to own, lease or rent the new unit or home. It’s important to understand what these options entail before deciding which one is right for you.
A large upfront entry payment, as well as service charges, maintenance and management fees may be payable if you’re buying or leasing the property. But there can be options when it comes to paying management fees. These include up-front (UMF) or deferred (DMF) payment structures.
The following table outlines the different fees you may have to pay and what they are for:
| Fee | What it is for? | How it is paid and refunded? |
|---|---|---|
| Entry cost | Purchase, lease or leasehold interest of retirement village home or unit. | Refundable lump sum. Fees may be deducted as agreed in the contract. Refunds are made in accordance with contract provisions. |
| Service fees | Covers insurance, rates, security, maintenance of common areas, gardens and roads. | Non-refundable. |
| Internal maintenance | Utility costs incurred by the resident, maintenance, repair and wear and tear of the home or unit. | Non-refundable. |
| Management fee | Represents the developer’s return on investment, also known as ‘capital replacement fee’. | Refer to contract provisions for maintenance and repair. Options:
|
It can be confusing to compare the difference payment options. If you or a loved one is selling the residential home to fund retirement accommodation, it’s important to assess how the sale could impact financial and tax positions, social security benefits and estate planning. The entry cost for a retirement home or units can involve you spending a substantial amount of funds. On top of this, you will also need to budget for on-going fees. Every retirement village has its own schedule of payments and fees and it’s important to understand the different payment options for the various retirement villages you are considering.
How the move can change things?
Selling a major asset such as the home can have an impact on your or a loved one’s pension. If you or a loved one intend to buy a new home, proceeds from the sale of the old home that are allocated for the purchase of the next home are generally exempt from Centrelink and Department of Veterans’ Affairs assets tests for up to 12 months but will be assessed under the income test.
If the entry cost for the retirement home is more than $146,500 (as of 20 September 2014) the amount will be exempt under the pension means tests and you or a loved one will be treated as a homeowner. If the entry cost is $146,500 or less, the amount will be counted as an asset under means testing rules, but no income will be attributed to you or your loved one. You or a loved one will be treated as a non-homeowner and may be eligible for rent assistance.
There may be funds left over if you or a loved one sell the home to pay for retirement accommodation costs. This money is assessable under the means tests. However, there may be ways to lower the value of income and assets, for instance by paying a higher entry contribution. The strategy may help to:
- Increase or retain the pension
- reduce deferred management fees
- preserve the amount for future use after it is refunded
- produce a capital gain on the retirement village home/unit
Case study – Kate
Kate is 72 and single. She has $1,200,000 in her bank account including $700,000 from the sale of her home. She wishes to move into a two bedroom retirement unit in her local area valued at $650,000. Maintenance and service fees are approximately $6,000 per annum. The management fee is 8% plus an additional 4% every year of residence, capped at a total of 40% of the sale price if DMF (or 40% of purchase price is UMF). She is given to payment options for these management fees:
Option 1
Defer payment of the management fee until she leaves and sells the unit. The management fee is calculated on the future sale of the unit. After she pays a lump sum of $650,000 for the units she has $550,000 left in the bank.
Option 2
In addition to paying a lump sum of $650,000 for the units she pays an upfront management fee of $260,000. No management fees are paid when she sells the unit. She is left with $290,000 in the bank.
Lump sum and upfront management fees are exempt from OVA/Social Security means tests if the combined amount is in excess of the extra allowable amount ($146,500).
Her cash flow after paying her costs of entry is estimated at:
| Option 1 | Option 2 | |
|---|---|---|
| Age pension | $8,640 | $18,780 |
| Investment return @ 4% pa | $22,000 | $11,600 |
| Maintenance and service fees | ($6,000) | ($6,000) |
| Cash available | $24,640 | $24,380 |
Below, we compare the refund to Kate after management fees are taken out. We assume 4% per annum growth on the value of the unit. The deferred management fee is calculated on the sale price.
| Kate leaves and sells the unit after five years | Option 1 | Option 2 |
|---|---|---|
| Entry fee and upfront management fee | $650,000 | $910,000 |
| Sale price | $790,824 | $790,824 |
| Deferred management fee | $221,431 | $0 |
| Amount refunded | $569,393 | $868,824 |
| Loss on entry and upfront management fee | -$80,607 | -$41,176 |
| Accommodation cost per week | $310 | $158 |
| Total investment and refunded assets | $1,119,394 | $1,158,824 |
| Kate leaves and sells the unit after ten years | Option 1 | Option 2 |
| Entry fee and upfront management fee | $650,000 | $910,000 |
| Sale price | $962,159 | $962,159 |
| Deferred management fee | $384,864 | NII |
| Amount refunded | $577,295 | $962,159 |
| Loss/profit on entry and upfront management fee | -$72,705 | $52,159 |
| Accommodation cost per week | -$140 | $100 |
| Total Investment and refunded assets | $1,127,295 | $1,252,159 |
| Difference in assets (benefits) | $124,864 |
Upfront payment of the management fee (option 2) results in a better outcome in Kate’s case. She receives a higher age pension to compensate for the loss of investment returns. In addition her estimated assets after selling the retirement unit are more than if she deferred the management fee ($124,864 benefit in year 10).
Option 2 allows her to maintain her level of assets providing more options and flexibility in the future, especially if she requires entry to an aged care facility. Another potential benefit of the strategy is that in the event Kate passes away, the amount of funds available for her beneficiaries may be higher.
- Increase the funds beneficiaries will inherit.
Things to consider
Everyone’s situation is different, so it’s important to work out a strategy that’s right for you or a loved one’s circumstances. Here are some useful questions to work through before choosing accommodation:
- Do you or a loved one need to be close to local amenities such as shops and public transport?
- Does the retirement village have the facilities and services that will provide the desired lifestyle?
- What will the total cost be, taking into consideration upfront payments and ongoing fees?
- How much of the entry contribution can be refunded when you or a loved one leaves?
- Will the pension be affected if you or a loved one has to sell the family home?
- Is the facility located in a growth area?
- Will restructuring your or a loved one’s assets and investments impact the will?
- Have you considered the future use of the entry cost when this is refunded? Who will this be paid to when you or your loved one passes away?
How an adviser can help?
A major lifestyle change can be a difficult step to make. One of the best things you can do is enlist the help of a financial adviser. Your financial adviser will be able to identify any possible issues, as well as put in place the best financial strategies suited to you or a loved one’s circumstances.
Contact Kimmorley Financial Management for further information on 07 5591 1725 or visit www.kfm.net.au.
Disclaimer
This information is of general nature only and is based on current laws and their interpretation. The application of the information will depend on the individual’s circumstances. Before making any investment decisions, we recommend you consult a financial adviser to take into account your particular investment objectives, financial situation and individual needs.