Understanding retirement village buyback schemes

If you’re contemplating a move to a retirement village, you’re probably not thinking about what happens after you leave, but you need to. One of the key considerations you need to think about is the amount of money you will get back, which can involve a complex calculation of management fees, sharing in capital gains or losses, renovation costs, sales commissions, and marketing fees, is a key element of your contract. The other aspect to consider is how quickly you can expect to receive your funds back.

What is a buyback?

A Buyback is when the retirement village operator buys back your unit if it is not sold within a certain period of time or if you meet certain conditions. The reason for this is to prevent a situation where a village resident is unable to access aged care or alternative living situations because their assets are locked in their unit.

The conditions and timeframes for retirement village buybacks are specified by state-based legislation. Generally speaking, the timeframes range from 18 months in South Australia and Queensland to no mandatory buyback, except for those moving into aged care, in Victoria. While in New South Wales there is a 6-month timeframe in metropolitan areas and 12 months in regional ones.

The legislation sets the time limits for buybacks, but it’s not uncommon to find villages, especially those managed by larger operators, offering shorter buyback periods or providing you with a buyback even though under the legislation it is not required. Sometimes, the timeframe will depend on the contract you choose, it can be as short as 3 months in states where no buyback is required.

How much is a buyback worth?

Now, let’s explore what a buyback is worth. Quantifying its value can be challenging; it’s a little bit like insurance—it only holds value if you need it. A buyback doesn’t dictate when you’ll receive your money; it merely sets the latest point at which you’ll get it. If your home in the village sells earlier, you’ll receive your money when the sale is completed. A buyback comes into play when your home hasn’t sold within the designated timeframe.

In recent years, the property market has experienced significant growth, and retirement village occupancy rates have been as high as 90 per cent, however the market goes in cycles, so this won’t always be the case. The bottom line is it’s impossible to know what the market conditions might be when you decide to leave the village.

A big part of a buyback’s value is what I call the “pillow factor”- basically the peace of mind you have in knowing that you or your estate will receive the funds within a specified timeframe. That is a hard thing to put a dollar value on.

If your next move is to an aged care home, the cost of your new accommodation becomes a significant consideration. Most individuals pay the market price for their aged care accommodation, which typically starts at around $500,000 in metropolitan areas but can go as high as $3 million if you have views of Sydney Harbour. In aged care any amount of the lump sum Refundable Accommodation Deposit (RAD) that you don’t pay has interest charged at a government set rate, currently that rate is 8.15 per cent p.a. The interest is charged daily and is called a Daily Accommodation Payment or DAP.  This is where it can be much easier to put a dollar value of your buyback.

Let’s look at an example

Let’s consider a scenario where you’re moving from a retirement village to aged care, and the price of your aged care accommodation is $550,000. Your exit entitlement from the retirement village is $400,000, and your home isn’t selling.

If your buyback is 18 months, then while you are waiting for the $400,000 to be refunded to you can pay a Daily Accommodation Payment (DAP) to the aged care facility of $89 per day. If your home doesn’t sell and you wait the full 18 months for the $400,000 to be paid to you then you will have paid almost $49,000 in Daily Accommodation Payment (DAP). If your buyback period is only 6 months, the DAP cost would be $16,300 over that period, saving you $32,700 and 12 months of uncertainty.

While 8.15 per cent per annum is the current interest rate used for aged care Daily Accommodation Payments, the rate is reviewed quarterly. The rate has been as low as 4.01 per cent per annum in April 2021 and as high as 11.75 per cent per annum in July 2008.

When considering a move to a retirement village most people tend to focus on the upfront costs, giving little thought to what happens after they leave. To make a well-informed decision you need to understand what the village costs will be upfront, while you live there and after you leave. You should also make sure you know how much money you will have available to invest or spend, the impact on your pension and other benefits, and if you get a home care package how the move will affect the cost of your package and the services you can receive.

Rachel Lane is author of Downsizing Made Simple with fellow finance expert Noel Whittaker, the new edition is now available to pre-order online. The companion website is there to guide your downsizing journey with great information, tools and easy-to-use resources.