ONE of the major things many people have to decide later in life is whether to move into a retirement home, which allows independent living, or aged-care accommodation.
The two are very different, and the costs vary significantly.
The listed Aveo group brought this issue to wide public attention in recent months when it was mired in public controversy over the nature of its financial service contracts at retirement villages.
Which would you choose for later-life accommodation?
The stock has lost almost a quarter of its value in recent months.
Curiously, Aveo has traditionally run retirement homes and is now entering the aged-care industry.
In any event, for the client facing either option the paperwork involved is significant.
Many contracts for retirement villages are notoriously long, running to more than 100 pages. What's more, they often include clauses enabling the operator to force people to move out if they are deemed no longer able to live independently.
While the price paid for a room in residential aged care is fully refundable, and guaranteed by the government, the fees and costs deducted from the amount originally paid for accommodation at retirement villages can be significant.
According to the Property Council of Australia, 20 years ago the average age of people moving into retirement villages in Australia was about 60. Today it is closer to 80.
Many owners of retirement villages have rejigged exit costs accordingly.
Where several years ago exit fees were typically 3% of the value of the unit per year of residence, capped at 30%, some owners of retirement villages today charge a flat fee of 15% of the value of the unit if a person leaves within the first year, 25% if the person leaves between one and two years, and 40% if the person leaves after two years.
There have been accusations that retirement home operators "churn" customers to attract these high exit fees. Certainly people have to take all this into account when making their decisions.
Take this example:
- Mary is an 83-year-old widow who has lived at home independently for many years.
- Her home was sold at auction, generating net proceeds of $1.1m after she repaid a mortgage of $420,000.
- She has a bank account with $5000, and is on a full age pension (currently $888.30 per fortnight).
- Mary is a social person but her health has deteriorated to a point where she struggles with her mobility.
- She believes she is not yet ready to move into residential aged care, and thinks that an apartment in a retirement home would suit her better.
- An ACAS assessment approved her for both residential respite and low-care residential permanent aged care.
- She prefers a one-bedroom apartment in a large retirement village that has just undergone a major refurbishment.
- The advertised upfront payment to enter the retirement village was $650,000.
- Under a typical retirement village contract, this amount would be subject to a deferred management fee during the period of Mary's occupancy (3% deducted for each six-month period in the first 18 months, then 1% each subsequent six months, up to a maximum of 30%).
- Mary would be responsible for all of her normal daily living expenses and utilities costs, just like any other home owner.
- When she left, the amount repaid would have the deferred management fee deducted as well as the costs of reinstatement and refurbishment, selling costs and legal costs.
If you model to compare the retirement village option against a low-care aged-care facility, here's what happens:
After starting with $1.1m in assets, Mary would be left with $900,000 if she left the retirement village after five years (this doesn't include the home care costs, which would probably go to thousands of dollars per year).
By comparison, the aged-care option would leave her with $1.05 million in net assets over the same five-year period, which includes all the care services and nursing support that she would require.
At the low-care aged-care facility the refundable accommodation deposit (formerly known as the bond) was $750,000 with an extra services fee of $50 per day. Clearly, the low-care aged-care facility is financially preferable.
John Rawling is an aged-care consultant at Joseph Palmer & Sons (Vic), investment managers and aged-care specialists.
For more details on this story, go to http://www.jpalmer.com.au/.
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