How retirement villages work

Navigating the financial and legal aspects of moving into a retirement village can be challenging. A retirement village should ideally be your last move because it’s costly to leave. Let's look at how villages work and key things you should know before making your decision.

Retirement villages offer independent living options for older adults, typically in villas or apartments, with an age restriction of 70 or 75 for entry. About 14% of retirees aged over 75 choose this lifestyle in New Zealand. These villages can range from small clusters with as few as two units to large communities with close to 300. Many retirement villages come with on-site amenities such as community centres, barbecue areas and even rest homes.

“The amenities that I like most of all are the pool, the spa, the pool table. We've just now got a table tennis table”

“I'm doing the exercises. Obviously, that's got to be good for me. Ten pin bowling. I'm an ace, bus trips, dartboard, we've got a movie theatre, we've got food, we've got everything.”

Villages provide a secure, social environment where people can be part of a community while not having to worry about property upkeep and ongoing bills associated with owning their own home. People also see retirement villages as providing a pathway to aged care, since they often have a rest home on site.

“The main reasons were that we were getting old. We just felt very vulnerable out there in the outside world.”

“The safety factor of it and the long-term care that you might receive if you need it. Making new friends is quite important and it's a support group for being part of a community.”

But what are you agreeing to when you sign up for retirement village living?

Most retirement villages operate under a 'license to occupy' model. This means you pay an upfront sum of capital and ongoing fees, but you don’t actually own the property. Instead, you buy the right to live in the unit, usually at close to 70% of the cost of what a similar property would cost outside the village. You also pay a weekly or monthly fee, which may be fixed or increase periodically. Since you do not own your home, retirement villages usually do not share any capital gains you would typically have in your own property.

“Not sharing in the capital gains, I think it's a concern for everybody that leaves their home of 20, 30, 40 years, that you're not going to get it. But it's a decision you have to make. It's a lifestyle and it's your life”

When you vacate the village eventually, there is also a deferred management fee paid to the village operator, typically 20% to 30%. For instance, if you pay $600,000 for a license to occupy, you might get back $420,000 when you leave, with $180,000 retained by the operator as the fee. This may reduce your options for alternative places to live if you want to leave the village.

As you start to explore different villages, consult with your lawyer early on, instead of waiting until the last minute. They can help identify any potential issues, ensuring you make an informed decision before emotionally committing to moving in.

Take the time to read all documents thoroughly. If there’s something you don’t understand, ask your lawyer to explain. For example, it’s important to understand that 'license to occupy' means you don’t own the unit, but you do have the right to live there.

“Part of it is getting your lawyer to go through it step by step. And if you've got any questions at all, just make sure that you ask and you're clear by the time you've gone through it.”

Retirement village contracts, known as Occupation Right Agreements, can be complex. It's compulsory to get legal advice before signing. Make sure your lawyer has experience with retirement villages to help navigate these lengthy documents.

“Navigating the documents was a nightmare. I must admit, our family did get involved and advised us.”

“We felt it was very important to talk to our lawyer, because there's all sorts of things in a contract that, you've got your head going around trying to think about moving into this and then you've got a contract. There's little things like, you know, if you've got an animal or a little puppy, you know, you've got to make sure that you can bring that puppy. So, there's all sorts of things. And to make sure that you know that this is not an investment, it's a right to occupy.”

If you make alternate arrangements with the village to what is in your contract – such as bringing in pets, for example – you’ll need to let your lawyer know to include it in writing. It also helps to pay close attention to any proposed changes to the village. For example, future construction plans might impact your unit’s sunlight. This information can be crucial in making your final decision.

5 tips to remember

1. Research early

Start your search and legal consultations soon to make an informed decision.

2. Understand the costs

Be aware of the lack of capital gains, the upfront costs, ongoing fees and the deferred management fee.

3. Get legal advice for all contracts

Ensure your lawyer has experience with retirement villages and reviews all contracts.

4. Read thoroughly

Carefully read all documents and understand the terms, especially 'license to occupy'.

5. Consider future changes

Look out for any village development plans that might affect your future living conditions.

Navigating the financial and legal aspects of moving into a retirement village can be challenging. However, by understanding the costs and implications, and considering your future needs and preferences, you can make a well-informed decision.

For more information, see Sorted’s guide on retirement villages at sorted.org.nz.