Retirement villages are not permitted to profit from ongoing fees, so contracts are how operators make money.
For residents, they determine the amount you pay on arrival, the amount you keep on departure, and how long it takes to get your hands back on your money.
Aveo is a major provider of independent living retirement villages. Earlier this month they started offering three choices of contract: Now, Later, and Bond.
Let's start with the similarities. All three contracts base management fees on the purchase price, and keep it simple - with no marketing, sales or renovation costs, and no sharing capital gain or loss. All also offer a six-month guarantee: if you move into an Aveo village but move out in less than six months you get 100 per cent of your money back.
Let's delve into the differences. Later is what the market has become used to: you pay the lowest possible entry price, and you receive 65 per cent of your money back within six months of exit. So all-up you pay a 35 per cent deferred management fee.
With the Now contract, you pay a lower management fee - only 15 per cent - but you pay it up front.
To make sure you get some value from the contract, the fee is amortised over 24 months, which means if you have to leave after 12 months, 50 per cent of your management fee is refunded to you within six months of your departure.
The Bond option charges a non-refundable administration fee of 3 per cent, and you pay 130 per cent of the entry price. Don't worry though, this contract returns your entire purchase price within three months of you leaving.
Each contract has pros and cons, but the real differences are in their effects on your cash flow, and on any government payments you are eligible for, such as age pension, rent assistance and home care package costs. Moving to residential aged care, your choice of contract may affect those costs too.
Let's look at an example. Jack and Shirley want to move into a two-bed unit at Aveo Kingston Green. They have $300,000 of liquid investments, $50,000 in personal assets, and a home worth $1 million. They receive the full age pension of $37,341 a year, supplemented by $15,000 investment income.
The Later contract means they pay $750,000 for their unit now, of which they lose $262,500 as an exit fee later. They will have $250,000 left from the sale of their home to add to their investments, which should bring in about $27,500 annual income, but the increased assets mean they will receive only $22,131 a year in age pension, an annual reduction of $15,210 from the government.
If they choose Now? Jack and Shirley pay $862,500 up front ($750,000 plus $112,500 management fee) and take $750,000 within six months of exit, saving $150,000 on management fees. With $437,500 to invest they can expect to receive $21,875 annual investment income, plus an age pension of almost $31,000.
If they choose Bond? They pay $997,500 up front, and will get $975,000 of it back within three months of leaving, losing only $22,500. Their cash flow would be the same as it is now, with the same yearly investment income of $15,000, and full age pension of $37,341.
So if Jack and Shirley live in an Aveo village for ten years, and their investments return 5 per cent a year, on average, they would be about $177,000 better off with the Bond contract than the Later contract.
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Noel answers your money questions
I am 59, earn around $55,000 a year and have around $514,000 accumulated in one of the top five super funds in Australia.
I currently rent a unit around $275 a week. I would like to retire within three years. I have no debts but would like to purchase an owner-occupied property for around $200,000 to move away from renting in retirement.
My question is, should I draw down a lump sum from super tax-free at age 60 to purchase a property or seek a mortgage now at low interest and pay it out in retirement?
If obtaining a mortgage now would suit, I would be keen to do this as early as possible, as my current lease finishes 14 December this year.
I think the loan is the best idea. The interest on the mortgage should be around 2 per cent, and your fund should be doing at least 7 per cent.
Just be aware that some lenders take a hard line against older people so start your application as soon as you can, and be prepared for the normal delays in processing. You may find it better to use a mortgage broker who would be conversant with the different banks requirements.
I am over 60 and self employed. I am putting $25,000 into super fund A, and claiming a tax deduction for it. This fund is in the accumulation phase.
Can I convert super fund B, into pension phase and withdraw money at the same time?
You can certainly contribute to your accumulation fund and keep in mind that the concessional limit is now $27,500 a year. Having turned 60 you have reached preservation age and therefore could commence a "transition to retirement" pension from super fund B.
You will, however, be limited to drawing income payments up to a maximum of 10 per cent of the account balance in super fund B.
For example, you will need a balance of at least $250,000 to draw $25,000 as an income payment.
I pay a daily accommodation fee for aged care as I do not qualify for a pension. I have often wondered if there is a maximum amount that can be charged and if so what is this amount?
I have tried to find this information on the net but there is only a reference to a "cap", but I'm unable to find out what this cap is.
Aged Care Guru, Rachel Lane, says that as someone who does not qualify as a low means resident you will pay the market price for your accommodation.
You can choose to pay it by a lump sum, a daily payment or a combination of the two. There isn't really a cap as such but an aged care home that wishes to charge a price above $550,000 need approval from the Aged Care Pricing Commissioner.
The most expensive aged care room is just under $3m but in most capital cities you will find rooms around the $500,000 price point. It's a lot like real estate, where the price will depend on location, amenities and good old supply and demand.
It's important to realise that accommodation is just one component, you will need to pay the basic daily fee, currently $53 a day and a means-tested care-fee based on your assets and income and the amount of care you need.
The means-tested care-fee can go as high as $250 a day, but there is an annual cap of $28,000 and a lifetime limit which includes any income tested fees you paid in home care of $68,000.
On top of these fees you should also make allowance for any lifestyle extras like a glass of wine with meals, hairdressing and entertainment services.
How you decide to pay for your aged care can have a significant impact on your asset position, cash flow, estate planning and even the cost of care itself. I can't stress enough the importance of seeking advice from a retirement living and aged care specialist.
I am 66, retired and receive a pension from my super - I am not eligible for any government pension. My son has been suggesting that with some surplus funds sitting in a bank account earning nothing, we should perhaps buy some gold.
I have heard that there are a lot of charges with gold and wanted to ask you if you think this is a good option and the best way to go about it.
I appreciate that there are many readers who are big fans of gold, but I am not one of them. As far as I am concerned you are punting on a commodity in the hope that its price will rise to enable you to make a profit.
In any event, if gold was your "thing" you could simply buy shares in leading gold producers which would pay you a dividend and would require no storage or insurance charges.
But given you are only 66, and eligible to contribute to super, a better option may be to put the spare money into your superannuation as a non-concessional contribution.
It would have to go into a separate accumulation account as your pension account cannot accept contributions.