There are many reasons why people move into a retirement village (village). Reasons range from the benefit of private accommodation with easy access to facilities, to social activities and freedom to choose a lifestyle that meets their needs.
Whilst predominantly a lifestyle decision, the move into a village can also generate several significant financial outcomes. We explore three of the key financial considerations below.
1. Paying the entry cost
When entering a village, clients generally pay an entry fee also known as an Entry Contribution (EC). The amount payable is based on several factors including the facilities available, the age, location and condition of the village. Depending on the type of contract the EC may be a rental agreement or may be based on an agreed price comprised of a loan, a payment or a combination thereof.
For those entering a village it is important to consider the impact of how the entry cost interacts with any social security benefit entitlements. For instance, as illustrated in Table 1, where the EC is greater than the Extra Allowable Amount (EAA) at the time of entry the amount paid is an exempt asset and the pensioner will be considered a homeowner.
For example, if Bob and Marley were to sell their former home and the net proceeds of $750,000 was used to pay the $398,0001 entry cost, they would continue to be treated as a couple homeowner but have an additional $352,000 in assessable assets under the Assets Test.
In some cases, a client may pay their EC in the form of more than one contract. For example, Adam obtains the right to reside in a village under two contracts for the purchase of a unit and a garage. The total amount paid under the contracts is Adam’s EC — the signing of more than one contract does not alter the assessment.
Alternatively, where a client had other funds to pay the EC and elected to retain their former home, it’s market value will generally count as an assessable asset from the date they move into the village. If the principal home is rented in any situation, income generated will count towards the Income Test.
In certain circumstances, where the move relates to the need for a substantial level of care, then the former home may be exempt under the Assets Test for a period of up to two years. Where the home is rented, any rent automatically counts.
Providing a substantial level of care involves one or more of the following:
- a partner in receipt of Carer’s Allowance, Carer’s Payment or Department of Veterans’ Affairs Carer Service Pension in respect of the caree;
- the caree is paid the Disability Support Pension and because of their medical condition they require assistance;
- the caree is over Age Pension age and regarded as frail; • the caree can provide medical evidence that they left their home because of illness;
- the caree can provide medical evidence that they required assistance after being discharged from hospital; or
- the caree has been assessed by an Aged Care Assessment Team and is waiting to be admitted to residential care or has been accepted for approved respite care.
2. Ongoing cashflow
Another consideration for village clients is the ability to meet their regular cash flow commitments. In general, monthly fees designed to cover the day-to-day management and maintenance of running a village often apply. Depending on the breadth and quality of facilities, ongoing costs will vary. With a nationwide average monthly service fee for single residents of $4092 per month, a regular review of ongoing cash flow can help ensure clients continue to achieve their long-term objectives.
For many clients, social security entitlements such as Age Pension or Rent Assistance may form a key component of their cash flow.
Table 1: The EC amount paid affects a person’s Centrelink assessment
|EC paid||EAA less than or equal to $203,0003||EAA more than $203,0003|
|Considered a homeowner?
|EC included in Assets Test?||Yes||No|
|Eligible for Rent Assistance?||Yes, if they pay enough rent||No|
For situations specific to villages, if a client is assessed as a non-homeowner, the fees and charges are assessed as rent and Rent Assistance may be payable if the client meets all the other eligibility requirements.
The amount of Rent Assistance that can be paid to eligible non-homeowners varies, depending on how much rent is paid. The minimum amount of rent for individuals without dependent children is $118.60 per fortnight for singles and $192.20 per fortnight for a couple combined. For every $1 of rent paid above the minimum amount, $0.75 of Rent Assistance is payable up to a maximum of $133 per fortnight for singles and $125.40 for couples combined.
If the client is assessed as a homeowner, they are not generally eligible for Rent Assistance. Although the EC counts as an asset for those who pay $203,0003 or less, it is not deemed for the Income Test.
For example, Mary has paid an EC of $180,000. She has $420,000 in savings and $5,000 home contents. As a non-homeowner, her assessable assets under the Assets Test is $605,000. For the Income Test, deemed income on $420,000 of financial assets would be assessed and she may be entitled to Rent Assistance.
For couples living together in a village, they will be paid an Age Pension based on the partnered rates and thresholds. However, if they live in a village and are affected by illness, they may be paid the higher ‘illness-separated rate’.
Another consideration relates to their ability to age in place, and to obtain access to the level of care they require should the need arise. We explore this in the following section.
3. Funding aged care
As health needs change over time, clients may need to access aged care services. Whether a client is accessing home care services or moving into a residential aged care facility, this change in circumstances may impact their cash flow.
Clients in receipt of a home care package can expect to fund a basic daily fee of $3,7123 per annum and/or an income-tested fee, depending on their assessable income. This cost is in addition to their ongoing monthly fees to the village and lifestyle expenses.
Importantly, where a client’s home care needs exceed the approved home care package funding level, additional drawdown of available assets may be required.
In cases where a person is moving from a village to a residential aged care facility, they are generally required to sell their unit (or share in the village) as soon as possible. As part of a resident’s contract, an exit fee or deferred management, may be payable upon exit. These fees can differ between providers. Two examples are illustrated in Table 2.
Table 2. Example of village exit fee costs
|Length of stay||12 years||10 years
|Percentage per year (exit fee)||4%||6%|
||10 years||5 years|
|Exit fee payable on sale price
|Capital gain share||$70,000 (35%)
|Return to resident||$280,000
The impact of moving into residential aged care for Mina and Bradley will depend on several factors. These factors include the advertised accommodation payment amount, existing assets and ongoing health expenses. While the average advertised accommodation payment amount in major cities is currently $423,0005 , clients may face higher prices depending on their preferred facility.
Let’s take a closer look at the value of advice for Mina who is 80, widowed and approved for aged care. She is meeting with her adviser to determine whether she will be able to pay for her aged care fees and $2,600 per annum of other living expenses.
Mina’s chosen room in a residential aged care facility has an advertised accommodation payment of $550,000. She agrees to that amount and uses the sale proceeds plus additional savings to pay a Refundable Accommodation Deposit of $550,000. She now has $350,000 in term deposits and cash and $5,000 in home contents. Her adviser recommends she invest a total of $300,000 into Challenger’s CarePlus using funds from her savings and term deposits (Table 3).
Table 3. Year one cash flow comparison6
|$350,000 savings and term deposits||$300,000 CarePlus $50,000 savings and term deposits
|Assessable assets (for aged care)||$905,000||$850,519|
|Assessable income (for aged care)||$29,455||$26,998|
|Daily means-tested amount||$94.18||$87.81
|Interest income (3%)
|Aged care fees|
|Basic daily fee||$18,038
|Daily means-tested fee||$14,140||$11,815|
|Total aged care fees||$32,178
|Total estate value
Investing $300,000 into Challenger’s CarePlus has helped Mina:
- continue to meet her cash flow requirements;
- improve her Age Pension by $2,457 in the first year;
- decrease her means-tested care fee by $2,325 in the first year; and
- increased her estate value by $4,866 at the end of year one.
Whilst predominantly a lifestyle decision, the move into a village can also generate several significant financial outcomes. Advisers can help clients achieve better outcomes in entry costs, ongoing cash flow and funding aged care.
12016 PWC/Property Council Retirement Census. Average national price for two bedroom independent living unit is $398,000.
22016 PWC/Property Council Retirement Census.
3Based on rates and thresholds as at 20 September 2017. Extra allowable amount is calculated as the difference between the homeowner and non-homeowner assets thresholds.
4Assumes 5% annual property growth each year, rounded.
5Aged Care Financing Authority | Annual Report on the Funding and Financing of the Aged Care Sector — 2017.
6Rates and thresholds as at 20 September 2017.
7Sourced from the Challenger Aged Care Calculator. CarePlus pricing as at 6 November 2017, based on an 80 year old female (DOB: 01/07/1937), monthly income payments, nil upfront adviser service fees and NSW as the state of residence.
The information contained in this update is current as at 13 November 2017 unless otherwise specified and is provided by Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (Challenger), the issuer of Challenger annuities (Annuity(ies)). It is intended solely for licensed financial advisers and this update must not be passed on to retail clients. The examples shown are for illustrative purposes only and are not a prediction or guarantee of any particular outcome. This information is not intended to be financial product advice and has been prepared without taking into account any person’s objectives, financial situation or needs. Each person should, therefore, consider its appropriateness having regard to these matters and the information in the product disclosure statement (PDS) for the applicable Annuity before deciding whether to acquire or continue to hold an Annuity. A copy of the PDS is available at www.challenger.com.au or by contacting our Adviser Services Team on 1800 621 009. This document may include statements of opinion, forward looking statements, forecasts or predictions based on current expectations about future events and results. Actual results may be materially different from those shown. This is because outcomes reflect the assumptions made and may be affected by known or unknown risks and uncertainties that are not able to be presently identified. Neither Challenger nor its related bodies corporate nor any of their employees receive any specific remuneration for any advice provided in respect of the Annuity. Some or all of Challenger group companies and their directors may benefit from fees and other benefits received by another group company. Any taxation, Centrelink and/or Department of Veterans’ Affairs illustrations are based on current law at the time of writing which may change at a future date. Neither Challenger, nor any of its officers or employees, is a registered tax (financial) adviser under the Tax Agent Service Act and it is not licensed or authorised to provide tax or social security advice. Before acting, we strongly recommend that prospective investors obtain financial product advice, as well as taxation and applicable social security advice from a professional and registered tax agent who can take into account the investor’s individual circumstances.