Levande, Australia's third-largest retirement village operator, has just announced that it will be providing new payment options across its villages from July 1. Providing different payment options is a trend that is growing across the industry with big and small operators, for-profit and not-for-profit offering a variety of different arrangements.
State-based legislation stops retirement villages from profiting from the weekly or monthly service fees so the overwhelming majority of payment options focus on the amount you pay upfront and the amount you get back (and how soon) when you leave. The general rule of thumb is that the more you pay upfront the less you pay at the end and vice-versa. Across the market you can find payment arrangements with exit fees of anything between zero and 100 per cent.
Levande's new contracts give you two options: you can pay your management fee when you leave, in which case it is 30 per cent or you can pay it upfront and pay 20 per cent. The new contracts remove the "unknowns" in calculating how much you will get back from the village by making the renovation and selling costs the responsibility of Levande and not sharing in capital gain or loss.
There is a six month "change of mind guarantee" if you don't like the village and if you move out within six months you won't pay a management fee.
And there is a six month guaranteed buyback so if your home doesn't sell in the future, Levande will buy it back after six months. The price of the two options are in line with the biggest players, Keyton and Aveo, who also offer contracts that let you pay upfront or at the end. However, Levande's options don't go as far as the others who also offer contracts with no exit fee.
This is how Levande's new options will work: if the apartment price is $750,000 and you choose to pay your management fee later, you would need to pay $225,000 which means you would get $525,000 back after you leave. If you pay it upfront then the management fee would be $150,000, so you pay $900,000 upfront and you get $750,000 back. By paying it upfront you are getting a discount of $75,000 because of the time value of money.
If you are thinking about when to pay your management fee, there are a few things to consider. If you don't have the funds or need access to the capital, then you don't have a choice but to pay when you leave. The second is how long you will live in the village. That's because if you stay for a very short time, say one year, you may actually pay more under the upfront option that the deferred option. Under the Levande options you pay 10 per cent in year one if you pay upfront and 6 per cent if you opt for the deferred option.
You also need to think about the discount the village is offering compared with what you could earn and how the options might impact on your age pension (if you get one).
Case study
Shirley is 73, receives the age pension and is thinking about downsizing into a Levande village.
Her home is worth $1 million, she has $250,000 in her investments and $25,000 of personal assets. If we use the apartment for $750,000 in the example above, then by paying the management fee of $150,000 upfront she would save $75,000. If she opted to defer her management fee and invested that $150,000, earning 5 per cent per annum, she would receive $7500 per year of income.
When it comes to her pension, if Shirley pays her management fee upfront she will receive $23,310 per year, whereas if she defers she will receive $11,610 per year in age pension.
While some people bemoan the complexity of payment options, the fact is that having different ways to pay can make moving to a retirement village more affordable. Where there is only one option it normally means that you are paying an exit fee and it is costing you more because you are paying it later.
If the village you are looking at moving to gives you payment options it is definitely worth crunching the numbers on what those options mean for you. If they don't, you can always ask for an option that suits you. Seeking specialist advice before you sign on the dotted line is a worthwhile investment.
- Rachel Lane has specialised in retirement living and aged care for 20 years, she is the principal of Aged Care Gurus and the co-author of Downsizing Made Simple.
