By Jenée Tibshraeny
To move into a retirement village or not?
About 12.5% of the 295,070 New Zealanders over 75-years-old have made the decision to go for it.
And with the country’s over-75 population set to increase by around 164% by 2043, the number of people exploring this type of accommodation is only set to burgeon.
So what do you need to consider if you or your family members are thinking about making the move?
The Commission for Financial Capability’s manager of retirement villages, Troy Churton, shares his advice in a Double Shot Interview.
- Use a lawyer AND financial adviser
Churton advises talking to both a lawyer and financial adviser from the get-go.
With the regime being disclosure-led, he says it’s difficult to go to a village and then say you didn’t understand an aspect of what you were signing up to.
This sounds obvious, yet Churton recognises decision-making can be emotional, especially if you’re considering freeing up equity from a long-held home.
Furthermore he recognises it’s unlikely many older people have a complete grasp of all the financial implications.
He admits retirement villages aren't right for everyone.
- Don’t see a move to a retirement village as an investment
Churton says moving to a village should not be seen as an investment, as few villages share any capital gain on the value of a unit when you leave.
As a resident you’ll pay a capital sum to purchase an occupation right agreement for your unit. Yet between 20% to 30% of this sum will usually become the operator’s over the first five years or so of your occupancy.
Operators refer to this as a deferred management fee, fixed deduction, and capital sum deduction among terms.
Some contracts go so far as to say that if there’s a capital loss, the resident could be asked to contribute to that loss.
However Churton says anecdotally an increasing number of operators are leaving this clause out of their occupation right agreements. And for those who have it, they’re becoming less likely to exercise their power to make a claim to loss.
- Understand the ways you might own or occupy a unit
There are a number of offerings under an occupation right agreement, with by far the most common one being a licence to occupy.
This gives you the right to live in the unit, and use the amenities, without ownership rights. You can’t usually borrow against the value of your unit.
Another type of agreement is one where you buy your own unit title. In some cases this might mean you become part of a body corporate.
However Churton says: “It’s becoming rarer and rarer for somebody to find an actual unit where they buy the unit title of that unit.”
Other agreements include cross leases, leases for life and rental units.
- Check to see whether weekly fees are fixed
While most operators will have fixed weekly fees, some will work on a cost recovery basis, which means fees could change.
Churton says any fee changes would need to be discussed and consulted on. They would usually involve the operator’s statutory supervisor.
Every operator is required to appoint an independent watchdog - a company or individual - to ensure the village is being run lawfully and prudently. Supervisors report to the Financial Markets Authority and Registrar of Retirement Villages.
“Professionally they have very high standards of care to fulfil their role,” Churton says.
“If you’re looking at a village which has a cost recovery model in the weekly fees, then you also obviously have a risk ratio that you’re happy to tolerate of 2% or 3% or whatever increase per annum over the time you’re there.”
- Realise it’s unlikely you’ll be able to add terms to your contract
Churton says around 30% of lawyers will try to negotiate certain terms with operators on behalf of their clients.
However operators, particularly those with more than one village, are unlikely to budge.
“They want to try to get consistency with their terms and they’re unlikely to change the substantive terms of the contract, just because one person isn’t quite happy.”
He says it’s more likely that over time they address a collective issue.
For example a corporate provider recently decided to stop charging residents weekly fees once they had terminated their licences.
Churton says, “There are certainly active lobbying residents out there and the Commission receives a number of their referrals.
“Overall however, the strong indications we get is that most residents are happy with the offering that they’ve entered in to.
“The number of complaints that we’ve started gathering data on, is still relative to the size of the industry, quite small…
“On the surface of it, it’s a very well performing industry and other jurisdictions from around the world are looking at what New Zealand is doing, and saying, ‘This is quite good’…
“Certainly it’s clear to me that operators are very aware of the need to innovate and not to fall too heavily on the laurels of the current profitable arrangements that they’ve got.”
Churton says there are some “discrete” issues, which the Commission is responsible for keeping an eye on.
The question is: “Is the regime future fit as well as being ok now - given that there are some clear trends in population growth and needs, especially to do with care?”
For more information, see this brochure put together by the Commission.