Retirement means a lot of things to different people. While it should conjure up images of a pleasant, rewarding and relaxing lifestyle, choosing your retirement lifestyle can be not only confusing but also downright stressful. Issues like life rights, share block developments and sectional title schemes can be and should be easily explained so that people are able to make an informed decision that’s right for them. Clarifying the options might even go some way to dispelling some popular myths about them too.
The first priority for considering your retirement is to decide how you want to enjoy your retirement before you look at the options.
The first priority for considering your retirement is to decide how you want to enjoy your retirement before you look at the options. Retirement is the beginning of a new chapter for everyone, whether you know where you’re headed or you are still making final decisions. Either way, it’s the season of your life when you get to enjoy the chance to reflect on your years of hard work, a season when you reap the rewards.
What does retirement mean to you? Is it the alluring promise of peace, quiet and financial security at the end of a fulfilling and successful career? Does the thought of retirement concern you? Perhaps you don’t feel fully prepared, or maybe you’re unclear about some of the bigger decisions, like where to settle, or how to invest.
Achieving your dream means you have to consider some basic lifestyle factors, says Mark Tame, Trustee of the Conversion Trust, developer of Napier Retirement Village in the Overberg. “It’s important to find somewhere where you are accommodated from your active years, right up to the possibility of assisted living and frail care. You want to be financially secure and live in an area where your physical safety is non-negotiable.”
While the above might sound like common sense, there is still confusion around the various options that are available to retirees, and there are often uncertainties about the security of investments in retirement accommodation. “While you want to know whether your retirement savings will last your lifetime, the other major questions that need to be asked are about levies and the re-sale arrangements for your accommodation,” explains Tame.
However, the good news is that, armed with the right information, it’s actually simpler to make these decisions than you might think, says Tame. Before you consider the options though, you have first to consider the various lifestyle elements that will be important to you in your retirement:
Where are your friends and family and does this limit your choice of location? Do you need and want to be close to them? Do you have any hobbies, sports and other interests because these also could have a bearing on where you choose to live? How marketable is your home? Do you need to sell your home and, if so, will it give you a surplus over the cost of your potential retirement home? Have you always had a dream to retire to the sea or the country? Are you looking for a change in scenery, new friends, new activities? Would you like a complete break? Have you considered a clean break and relocating to the country, for example, and going somewhere that might give you what you want?
Once you have decided what you want in terms of your retirement lifestyle, you can now start to explore the options, which, in simple terms, can be divided into three main categories: the life right option, sectional title and share block developments.
The Life Right Model
This provides you and your spouse the right to occupy a cottage or apartment for the rest of your life.
“When you enter into a life right scheme you simply purchase the right to occupy a unit or cottage for the rest of your life or until you sell that right.
“The ownership of the unit is retained by the development and is not transferred to the individual as with sectional title units,” says Tame.
Life right falls under the Housing Development Scheme for Retired Persons Act, protecting buyers financially and ensuring sales contracts are followed through on. No transfer duties, registration fees or value added tax are payable.
There are several life right options available. Some provide for fixed levies and limited capital recovery, while others, with variable levies, provide for full capital recovery. Monthly levies, of course, go towards the upkeep and operational costs of the complex.
The life right is a popular, widely practiced model around the world. In the United States and Australia, for example, life rights are the most common type of retirement property sale. In New Zealand up to 80% of residents in a retirement village have a life right agreement.
Sectional title schemes
When purchasing a unit via sectional title, registration is done through the Deeds Office by a conveyancer. This does mean that expenses build up, what with transfer duties and conveyancing costs.
It also comes with complex administrative infrastructure, as it is subject to rigorous legislative requirements. There is often the question of which legislation takes precedence – the Sectional Title Act or the Housing Schemes for Retired Persons Act.
Share block schemes
This is a less frequently used model for retirement. This option provides owners of company shares the right of occupation to certain portions of the building. The company owns the building and shares are allocated into share blocks.
A sale agreement is required for the valid sale of a share block unit and transfer duty is payablee on the purchase price to the Receiver of Revenue.
However, the legal structure that you purchase into is ultimately of secondary importance when compared with the structure of the individual retirement village with regards to levies and on-sale conditions.
The importance of levies
“Retirees living in retirement villages must keep in mind that the standard of services will have a direct influence on the reputation of a village and the value of the units when it comes to re-sales,” says Tame.
This means that levies should be calculated as accurately and realistically as possible in order to maintain a high quality of the services that are offered.
So, let’s assume you have always had a dream of retiring to the country, of getting away from the grime and crime of a city and that village life appeals to you, and that having considered the security of each financial structure, you have decided the ‘life right’ model would suit you best.
What are the benefits that would help you choose such an option or not?
At Napier Retirement Village, Tame says the acquisition process of cottages and completed units means you are able to choose your own plot and make custom alterations while only paying the balance on the deposit once the unit is 100% complete. This prevents any nasty surprises when the time comes for you to move in. The units are complete before you pay the balance and ready for immediate occupation.
The transferring attorneys hold the 10% deposit in a trust where it earns interest until the date of occupation.
In the event of a sale, the outgoing resident or deceased estate receives a percentage of the resale price. “At Napier Retirement Village the resale cottage or unit will be offered to those on a priority waiting list, which will be managed by the Conversion Trust to ensure that the sales value of all units remain market related."
On transfer of the re-sale property, the seller will pay 7.5% of the resale price to the Trust as a sales/marketing management fee, and 7.5% to the levy stabilisation fund controlled by the executive committee of the Napier Retirement Village Management Association, explains Tame.
This levy stabilisation fund is extremely important because of the stabilising effect it has on the monthly levy.
“These extra funds not only contribute towards the running of the village but also keep the monthly costs low and remove much of the inflationary risk from the retirement equation,” says Tame.
Unfortunately, this isn’t necessarily the case with many retirement villages but is another example of how a retirement village should consider its residents is Napier Retirement Village’s early completion of all communal facilities. “At Napier we decided not to wait until a predetermined level of sales had been achieved before we built and completed the communal areas and facilities, making them available to the very first occupants.”
Napier’s communal facilities include a clubhouse, library, two lounges, gym, solar heated pool, healthcare facility, dining facilities, laundry and kitchen.
Because the life right asset is an investment for the developer as well as the life right holder, the developer will make sure that everything is done to protect and maintain the property, going out of its way to ensure solid investment appreciation and returns for both, says Tame.