It’s more and more common for retirement units to be sold on a ‘life rights’ basis. But still many retirees don’t fully understand the concept. Candice Wernick (CFP®) of BDO Wealth Advisers unpacks the pros and cons – for you and your heirs.
It’s that time of your life. You’ve worked hard, and now it’s time to settle into your retirement. Besides deciding on your retirement home, you have to make sure you can afford the lifestyle you would like to live. After working hard for decades, you certainly deserve it!
Lots of retirees opt to move into a retirement village due to the security and ‘resort-style’ living. In many retirement villages, you will find that you can only purchase a ‘life right’ in the complex. This may be an entirely new term for you. Or it may be one you have heard about but never entirely understood. This article will fill in the blanks by helping you to understand what a life right contract is and taking a look at the financial pros and cons.
What is a life right?
A life right is a contract entered into where you, as a retiree, purchase the right to live in a home in a retirement village for the remainder of your life, and the developer retains the unit’s ownership. Upon your death, the right reverts back to the developer who will resell the unit. The amount that your deceased estate will receive on your death as compensation is outlined in the contract.
A couple can also enter into a life right contract. In this case, the right extends to both partners and is enjoyed until the death of the last surviving partner.
Retirees who enter into a life right contract are protected under the Housing Development Schemes for Retired Persons Act 65 of 1988 (HDSRPA). The Act states that you must be at least 50 to enter a life right contract, but retirement villages do sometimes have their own (higher) minimum entry age.
The contract details all the rules and limitations of purchasing the life right, as well as what compensation you will receive when you pass away or decide to move out of the retirement village. It is crucial to fully understand all the terms and conditions laid out in the contract to ensure you are not caught out.
Less admin. Lower costs.
Buying a life right in a retirement village is usually more affordable than buying an equivalent unit outright. This is ideal if you have less capital available. What’s more, as the property is not being transferred into your name, no transfer/bond costs will apply. Finally, the developer is responsible for the maintenance and upkeep of both the unit and the village. This takes a huge burden off of you – both in terms of cost and effort.
The developer is also required by law to provide a two-year cost estimate of all levies. We all know budgeting is super important, especially when you are retired. This is a great advantage as it enables you to plan your monthly spending more accurately.
Most retirement villages offer a range of added benefits. These include daily meals, coffee shops, cleaning services and libraries, among other things. We’d advise looking into the costs (if any) associated with these additional facilities, as they may provide an opportunity to reduce your budget.
Financial fine print
The contract states the amount you/your estate will receive on termination of the life right. This amount may be your purchase price plus a percentage of any profit made on the resale of the unit. But it could also be LESS than the amount you paid. If you are unsure about the terms of the contract, chat with your financial planner or consult a legal professional to help you understand the return on investment. If you really want to live in a particular property you may be prepared to take a financial hit, but please make sure you understand the fine print before signing on the dotted line.
Nothing to bequeath
When you (or your surviving partner) dies, you cannot bequeath the life right to anyone in your Will. The right will revert to the developer and they will, in turn, resell the unit.
If you’ve entered into a life right contract as a couple, no compensation is payable after the death of the first spouse. The life right simply continues in favour of the survivor. Only on the death of the last surviving spouse will an amount become payable to that spouse’s estate. The life right contract cannot be ‘split’. This means that the estate of the first spouse to die receives no benefit or compensation. This is a very important consideration if you and your partner/spouse have different provisions in your Wills. Depending on who dies first, there may be a significant gap in what you thought your loved ones would be inheriting.
As you are not the homeowner, the developer has to arrange the resale of your unit. Only once it is sold will the proceeds be paid to your estate. While this does take some admin off your executor’s hands, it can lead to a delay in your estate being wound up if the developer struggles to sell it. What’s more, your estate will still be liable for the levies until the unit is sold. The longer the sale takes, the higher the expenses for your estate.
The bottom line
As life rights grow in popularity, there’s a very good chance you or a loved one will enter into this kind of contract. In this article we’ve provided a basic overview of the concept and looked at a few of the main financial considerations to take into account before purchasing a life right.
To ensure that your golden years are just that, I would encourage you to speak to a Certified Financial Planner® before entering into a life rights contract. Making the right decision will have a lasting impact for both you and your heirs.
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