Nick Bruining Q+A: Beware the massive exit fees and costs of selling up after living in a retirement village

Question

About 11 years ago, my father and his then-partner purchased a retirement village unit in the western suburbs for $860,000.

Last year, my father was moved into aged care and the unit was handed back to the operators to sell.

The unit required some repairs and a general refurbishment. It was sold for $910,000 and the amount paid out was just over $600,000.

We were devastated to see the costs charged by the village operators were more than $310,000.

This seems extraordinary. Is it legal?

Answer

Your situation is not uncommon. It is crucial for anyone entering a retirement village to fully understand some basic concepts behind the transaction before signing up.

A retirement village allows you to enjoy the amenities and company of others in a similar age group. However, it is not a real estate investment.

In effect, it involves you buying the right to live in a room — or rooms — owned by the operators. You do so, agreeing to all the terms and conditions set out in the contract, which is typically long and detailed.

Because a retirement village home is not an asset that can be readily sold — except under the terms of the operator’s contract — it can never be used as security for a loan, such as a reverse mortgage or Centrelink’s Home Equity Access Scheme.

The contract typically sets out what you can and can’t do to the buildings. Any modifications or repairs generally need to be done by the village operator or their contractors at your expense.

When you decide to move, you will normally be required to use the operator’s sales agent, including a non-negotiable rate of commission.

Most contracts also include a deferred management fee, a set amount typically charged monthly. It accumulates each month and the total is deducted from the sale price when the accommodation is vacated and on-sold.

The longer you stay in the unit, the larger this fee will be. It is also applied for a period, regardless of whether or not there is anyone living in the unit. These unoccupied deferred management fees are capped at three months for contracts started after April 2014 and up to six months for contacts made before that date.

There may be other exit costs. Be aware of these costs as in some cases, the amount remaining may be insufficient to meet the costs of residential aged care later in life.

Question

I have collected a number of superannuation funds over the years, each with an amount of life insurance included. They add up to a reasonable level of cover.

Some years ago, I received treatment for cancer and have been told that any application for additional insurance or a new policy is unlikely to be accepted by the insurer.

One particular fund is relatively low-cost and has insurance premiums which are on-par or cheaper than some of the others. I have been told about consolidation but am unsure how to do it.

Answer

The process is relatively straightforward but you must complete all of the steps in order.

Start by contacting the selected fund concerned and ask for the booklet dealing with insurance to be sent to you or download it from the fund’s website.

Make sure that you are comparing like-for-like, and particularly that the disability policy is the same.

Next, establish that you can transfer the existing cover across. You will find that some funds have age restrictions and won’t transfer all policies. For example, some won’t accept a transfer of income protection policies.

Next, provide the new fund with statements showing the cover levels along with a disclosure that you received treatment for cancer in the past. This may trigger follow-up questions and, in any event, ask for written confirmation that the transferred cover will be accepted.

Only then should you move to transfer the super funds. If you can’t transfer cover, you could transfer the bulk of the invested money but ensure that there are sufficient funds in the existing schemes to pay the ongoing premiums.

It may require a top-up contribution to the funds concerned.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association