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What Retirees Need To Ask About Costs And Conditions Before Downsizing From Family Home


John Crowhurst and his wife Mary retired to the leafy inner suburbs of Adelaide and live in a smaller version of their previous family home with a garden, rooms for family visits, close to friends and plenty of nearby amenities.

Crowhurst, 75, a retired surgeon, says they love the convenience and privacy of their own semi-detached home rather than a more communal retirement village where you don't get to choose your neighbours.

"You have to accept who is already there," he says about moving into a retirement complex.

Crowhurst's attitude is representative of an increasing number of retirees who are rejecting traditional retirement digs for smaller versions of their family homes with a small garden, parking and extra bedrooms for the grandchildren.

Sales of purpose-built, low-rise apartments for retirees are increasing around inner suburban postcodes that offer amenities, public transport and some unique features, such as parks or the beach, says Daren Macdonald, a partner with ShineWing Australia, a property consultancy.

"A lot of them are opting for low-rise apartments with three bedrooms, double car parks and other facilities in the same suburb as their former family home," says McDonald.

Crowhurst says in 10 years the couple will probably consider selling their home and downsize again into a low-maintenance resort-style apartment, with a gymnasium and swimming pool, and use any remaining capital to top up their superannuation.

Convenience and security

By contrast, Helen Williamson, 71, mother of two and grandmother of six, loves living in a retirement village because of the company, convenience and security.

"I like the apartment, like the position and the lifestyle suits me," Williamson says about her two-bedroom apartment.

She had a financial adviser review the contract and is happy with the terms, conditions and transparency. The apartment complex is owned and run by Australian Unity.

Scott Whiteoak, an architect and director of Ellivo Architects, says many retirees, particularly the Baby Boomers, are looking for something different and reject the traditional retirement village route taken by their parents.

"What is being often offered to retirees is not what many people want," says Whiteoak.

"The bulk of retirement accommodation is between 30 and 50 years old and not appropriately designed for retiree aspirations."

He says recent analysis shows most Baby Boomers want a small detached house on its own land compared to only 3 per cent wanting to live in a retirement village or community.

Financial juggle

Choosing the right retirement accommodation can involve juggling a complex mix of family, financial and emotional issues and be very difficult to unwind once a commitment is made.

For example, the family home is exempt from the assets test used for calculating pension entitlements, which means injecting funds from its sale into superannuation could be a financial step backwards.

The current pension assets test is $380,500 for a couple with a home and $583,000 for a couple without.

"It's the big sleeper issue for many retirees," says Andrew Peters, managing director of Semaphore Private, a financial adviser, who says many retirees are unwilling to sacrifice their government part age pension.

From July 1 it could become even more complex because individuals aged 65 or over should be able to sell their principal place of residence if it has been held for a minimum of 10 years and deposit up to $300,000 of the proceeds into superannuation.

Retirees will be able to inject up to $300,000 of the proceeds from the sale of the family home into super even if they have already transferred the maximum amount of $1.6 million into a private pension. But any amount over $1.6 million will need to be placed in an accumulation account, where earnings are taxed at 15 per cent.

Couples will be able to deposit $600,000.

This assumes the legislation before federal parliament is passed.

Run the figures

Craig Meldrum, Australian Unity's head of technical services and financial advice, says many retiring couples spend more than expected on downsizing, which means they have less cash for their retirement living.

For example, downsizing from a $3 million to a $2 million property is likely to cost more than $100,000 in real estate agent commissions, legal fees, moving expenses and related costs, according to analysis.

There are dozens of companies offering retirement village accommodation, ranging from blue chip listed fund managers like Australian Unity to fringe operators offering little more than pre-fabricated housing on former industrial sites.

Aveo Group, the largest owner and operator of retirement communities in Australia, accounts for just over 2 per cent of the market. Aveo is fighting a class action by residents who allege the contracts are restrictive.

Many villages offer services such as meals, on-site medical staff and house cleaning. Some of these services are included in the overall fee, while others are opt-in with residents choosing whether to pay the additional charges, according to research company IbisWorld.

Check exit fees

Meldrum recommends seeking expert legal and financial advice to help navigate the small print, identify charges and understand multiple establishment, on-going and exit fees.

For example, the accompanying table provides details of how the entry and departure fees are calculated for a popular inner Melbourne Australian Unity apartment complex.

The two-bedroom apartments are self-contained with their own kitchens. The example assumes the apartment was bought for $850,000 and increased by 30 per cent to $1.14 million over 10 years.

The departure fee is capped after six years (based on 5 per cent a year for the first two years and 4 per cent for years three to six. Also deducted is 50 per cent of any capital gain, in this case $145,000. That leaves about $774,000 payable to the resident (or their estate).

Units are occupied under a 99-year lease. There is a refundable $5000 holding deposit to secure an interest in an apartment and an additional $10,000 deposit upon signing and document administration fees of about $1300.

In addition, there are monthly maintenance fees of $684, plus utility maintenance fees, personal telephone costs, personal contents insurance and council rates.

By Duncan Hughes

Financial Review

17 November 2017


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