Imagine moving into a retirement village thinking you've secured a great deal, only to find out that the cheapest home comes with a steep price tag when you leave. For many Australians, the biggest financial question is not whether they can afford to move in, but what happens when they go.

New research suggests that retirement village contracts, built around an exit fee model, can have a hidden cost. The latest Retirement Living Council/PwC Retirement Village Census found that exit fees are still the most common contract, with an average fee of 33%. However, last year, upfront management fees represented 8% of contracts.

So, what's the difference between an exit fee and an upfront management fee? An exit fee is taken when you leave the village, while an upfront management fee is paid before you even enter. While it may seem like a small number, it's potentially a significant proportion of residents because it's not offered by all villages.

Rachel Lane, author of Downsizing Made Simple, explains that paying the management fee upfront can have several benefits. The biggest one is likely to be the discount. Because the operator receives the payment earlier, they charge less

  • 20% upfront compared with 30% or 35% at the end is common.

But the financial implications extend far beyond the management fee. Moving into a retirement village with an exit fee might be cheap, but once you realise what it means for your pension, it can make the move unaffordable. That's because when you go over the asset threshold, your pension reduces by $7800 a year for every $100,000 of assets.

Paying the management fee upfront can enable you to preserve some of that pension. Additionally, how you pay for your home in the village can also impact on your cost of care in the village and beyond. Support at Home contributions are closely linked to pension means testing, so paying in a way that preserves pension can reduce your contributions.

Longer term, if you move into an aged care home, paying upfront normally means your exit payment from the village is higher (and sometimes quicker), leaving more money to pay towards a Refundable Accommodation Deposit (RAD). Here's an example.

A resident buys a two-bedroom retirement village unit. The options are to pay $850,000 with a 33% exit fee or pay $850,000 plus 20% as an upfront management fee ($170,000). There is a general service fee of $645 per month.

After 10 years, the difference is around $240,500. Of course, by paying upfront, you are forgoing the income the $170,000 could earn. At 5% per annum over 10 years, that's $85,000.

It's worth crunching the numbers, because the cheapest home in a retirement village isn't always the most affordable. Rachel Lane advises residents to carefully consider their options and not be swayed by the initial cost. 'It's not just about the upfront cost,' she says. 'You need to think about the long-term implications and how it will affect your pension.'