Retirement Villages - What you need to know

Retirement Villages - What you need to know

Over the last 10 years retirement villages have become an increasingly popular option for people looking for a change in lifestyle in their retirement years. The number of retirement villages is only likely to increase to accommodate our ageing population.

Retirement villages are an attractive option because they can offer a good balance between living independently and having access to support and healthcare. Many elderly people view moving into a retirement village unit as a safe, secure and convenient way of life. However, the financial and opportunity costs involved in entering into a retirement village need to be carefully considered. 

A person enters into a retirement village unit on the basis of an occupation right agreement, or a licence to occupy. Rather than buying the unit, you are buying the right to occupy it and to use the facilities and services at the village. 

A capital sum is paid to the village up front in exchange for the resident having exclusive use of a designated unit, apartment or villa, as well as shared use of the common areas and facilities such as swimming pool, gardens and bowling greens. The capital outlay is typically in the range of $500,000 to $750,000, although some residences are in excess of $1 million. In addition to the purchase price, residents pay a weekly or monthly fee for outgoings which may be fixed or adjusted for inflation.  A Trust or other entity cannot purchase an occupation right agreement. 

Residents do not usually receive any capital gain and will generally not get back what they paid for the unit. This is because a ‘deferred management fee’ (DMF) applies, which is the amount deducted by the village on sale or when the licence ends. This is generally a percentage of the purchase price multiplied by the number of years of occupancy. The DMF is typically capped at between 20-30 per cent accruing over three to five years.

A resident therefore invests in excess of half a million dollars and receives about 70% of this investment back on termination of the licence. This may occur five, ten or even twenty years after the resident enters into the arrangement. The capital sum does not grow over time; indeed, the capital investment reduces in return for your right to occupy and enjoy the unit and facilities. 

The Retirement Villages Act 2003 provides that an intending resident must receive independent legal advice from a lawyer before signing an occupation right agreement.

Retirement villages can offer a thriving community of support and camaraderie. The benefits of having other people around at a similar stage of life cannot be overstated, particularly for residents who are widowed. Safety and comfort for seniors are paramount considerations and are inherent in the make-up of the typical retirement village.

Entering into a retirement village occupation licence is a lifestyle choice with significant cost involved. It is not an investment decision but a lifestyle one. Our experience is that the majority of villages are well-run and offer a good level of security and convenience that is ideal for people who are retired and seeking a relaxed lifestyle. Removing the stress and complications associated with home ownership is attractive to many people too.

We recommend that if you are thinking of entering a retirement village that you consider your life circumstances, goals and alternative living arrangements before signing up to a licence to occupy.

If you are considering entering a retirement village or wish to know more about the process, please contact Samuel Ames, solicitor on 09 486 9579 or email samuel.ames@turnerhopkins.co.nz

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