Poverty/Financial Trap

The No U-Turn Predicament

The impact of the following on the $ value of capital over time has the capacity to create a 'poverty trap' for some should they choose or need to leave the village to re-enter the property market or meet the cost of a bond for the nursing home of their choice.

• Deferred Management Fee
• Inflation
• Rising Property Prices
• Rising Aged Care Entry Costs
• Devaluing impact of inflation on the refundable amount held by the operator until departure from the village. (interest free loan to the operator)
• Whether the Deferred Management Fee is calculated on the exit price rather than the entry price.
• Whether the lease/licence contract of occupancy contains a provision for the resident to receive or share in any capital appreciation in the value of the unit over the period of occupancy.
• Costs associated with a retirement village not generally associated with a residential lease - maintenance, refurbishment, administration.

This impact has the capacity to create a 'poverty trap' for some residents should they desire to leave the village to re-enter the property market or to meet aged care costs.

The higher the percentage of total capital resources used to enter a retirement village increases the chance of a 'poverty trap' should a change in personal circumstances arise. Without further access to capital or family support the resident is essentially 'trapped' in their situation.

The example below is where a person has a capital base of $500,000.00, sufficient to meet the cost of either entering a Retirement Village or a Nursing Home depending on their personal circumstances. Should they enter a Retirement Village the impact of the 'Deferred Fee' on their in-going capital amount together with the impact of rising nursing home entry prices is such that:-
- after 5 years they will be $125,000.00 short of the entry cost to a Nursing Home of their choice.
- after 10 years they will be $250,000.00 short of the entry cost to the Nursing Home of their choice.

Their ability to leave the retirement village for whatever reason has weakened as each year passed and hence essentially becoming 'trapped' in the ever reducing 'present day value' of their original capital base of $500,000.00.

Industry data shows 41% of retirement village residents receive no share from the village operator of the appreciation in the property value which may have offered some protection. There is no legislative protection for retirees from this so named retirement village financial/poverty trap.