At some point down the line you might be faced with an important financial decision – do you move your parents into a retirement village or do you add another room onto your house and have them stay with you? If you are less inclined to have your folks dining with you every evening, then this is a blog post you want to read 🙂
You have two options if you decide to go the retirement village route.
You can either buy the property outright or you can buy a life right.
What’s the difference?
If you buy the property outright then you own it. You can sell it whenever you like and the proceeds of the sale are yours. When you opt for a life right, you are buying the right to stay in the property for the rest of your life in exchange for a fixed amount (purchase price of the unit). In most cases you can either pay the purchase price with a once off payment or over a period of time in regular installments (a bit like a mortgage repayment)
Do you get anything back if you opt for a life rights retirement village?
The rules will differ from one retirement village to the next, but in most cases you will get a portion of the purchase price back after a period of time has passed.
Here is a quick example to better illustrate the point:
Jeffrey is 70 and has decided to move into a retirement village. The retirement village he has picked doesn’t have the option for outright ownership, they only offer a life rights option.
Important to mention at this point that each developer who builds a retirement village will have three options to pick from:
- Full title (you own the property outright)
- Sectional title (you own the unit like a townhouse)
- Life rights (you have no ownership rights, but the right to live in the property for the rest of your life)
Back to Jeffrey.
The purchase price of the unit is R1,000 000 and the retirement village doesn’t have a repayment plan. Jeffrey decides to take up the offer and buy because the option allows him (or his dependents) to sell the unit after 15 years and enjoy 50% of the value in the property at that stage. Or Jeffrey can decide to stay in the unit until he passes away.
Let’s fast forward 15 years. Jeffrey is 85 and wants to spend the last few years of his life with his son overseas. He decides to sell his unit (or the life rights to be exact). The property is now worth R2,000 000. That means Jeffrey walks away with a R1,000 000 and the next person looking to take over the life rights picks it up for R2,000 000.
In this particular instance it’s worked out nicely for Jeffrey. He has had the benefit of staying in the property for 15 years and has recouped his initial investment.
But had Jeffrey died 5 years into his retirement, his dependents wouldn’t have gained anything and the retirement village would have been the one to score out the deal.
You really need to think carefully about your decision.
On the one hand it might be better to buy the property outright so if you decide to move, you can recover the monies and move on. Plus, if you pass away, the property will form part of your Estate and can be left to your kids as an inheritance.
The downside is that the property market might have taken a dip, or the area you have bought into has become less desirable and you might be forced to sit it out and wait before trying to sell.
At least with life rights, that risk has been taken away. You have decided this will be the last place you stay in and until the day your name is called by a higher being, you’ve paid your bucks and you have a roof over your head (no market volatility to deal with).
One of the benefits of buying into a retirement village with life rights (rather than buying the property outright) is avoiding transfer duties. That could be a huge saving straight off the bat. You don’t need to have sleepless nights about special levies or maintenance costs further down the line.
Other stuff to consider
Does the retirement village have a frail care facility?
If you are lucky you might get through your retirement unscathed by serious illness and simply slip away quietly in your bed. But you might get frail and sick and require some assistance. These are all things that need to be considered when making your decision.
Making the right choice will have a significant influence on the lifestyle you will achieve during your retirement. This exercise should be done in conjunction with your entire financial plan; check that you would qualify for a loan and take into account the structure of your other investments.
Until next time.
The Wise About Life team
