How the Pension Loan Scheme could help your clients boost their retirement income

The Federal Government’s Pension Loans Scheme (PLS) could be a worthwhile option to boost your clients’ retirement income or afford expenses such as home care. Despite the name, they don’t need to be on a pension to access it either. Here we share how the Scheme works and how your clients can access it.

What is the Pension Loan Scheme?

The Pension Loan Scheme is a Federal Government initiative administered by Centerlink (or DVA) that operates in a similar way to a reverse mortgage – it provides a fortnightly income stream by taking out a loan against the equity in an individual’s home or other real property that they own.

Borrowers must pay interest on the loan, but regular repayments are not required and instead added to the loan amount. Individuals can remain in their home until it is sold, usually on their death.

Little is known about the Pension Loan Scheme, even though it has been in place for over 30 years. It was first established in 1985 when the Hawke Government re-introduced the asset test for the Age Pension. However few people knew about it and take-up was limited, mainly due to fairly restrictive eligibility rules.

That all changed in 2019 when the Morrison Government expanded the eligibility criteria to include full Age Pensioners and more self-funded retirees to participate in the Scheme.  The Pension Loan Scheme is now available to all retirees of Age Pension age who meet the qualification criteria.

According to the Department of Social Services, at 30 June 2020, there were 3,142 pension loans totalling $52 million.

Who is eligible for the Pension Loans Scheme?

Individuals who are of Age Pension age and who own property in Australia will most likely meet the qualification criteria.

To qualify for the Pension Loan Scheme, individuals must:

  • Be of Age Pension age, which is currently 66 years, but increasing gradually to 67 on 1 July 2023
  • Meet the Age Pension citizenship/ residency requirements
  • Own real estate in Australia that can be used as security for the loan, including houses, units, farms, commercial premises, vacant land and residential blocks (retirement villages and relocatable homes are exempt)
  • Have adequate and appropriate insurance covering the real estate offered as security
  • Not be bankrupt or subject to a personal insolvency agreement.
How much can you receive from the Pension Loan Scheme?

The Pension Loan Scheme will loan any amount up to the difference between an individual’s current pension entitlement (possibly nil) and 150 per cent of the maximum rate of pension, paid each fortnight.

This currently corresponds to:

  • A maximum of $37,155.30 per annum for singles
  • A maximum of $56,011.80 per annum for couples

The maximum loan amount depends on an individual’s age when applying for the loan, the value of the net equity in their property and how much equity they would like to retain in their home.  The maximum loan amount generally increases each year as they get older and their property’s value increases.

The fortnightly loan payments stop once their loan balance reaches their maximum loan amount. Interest continues to be added to the outstanding balance until the loan is fully repaid.

Case study: Michael and Sue, self-funded retiree couple

Michael and Sue are aged 73 and 72 years respectively and own their $2 million home in Sydney outright without a mortgage.  They draw the maximum Pension Loan Scheme payment of $2,154 per fortnight (or $56, 012 per year) to top up their income from term deposits and bank dividends.

It’s estimated that Michael and Sue will be able to draw the maximum Pension Loan Scheme payment (CPI adjusted) for 22 years.  They will have still 38% net equity in their home after 20 years, as they approach their mid-90s.

Alternatively, Michael and Sue could draw $1,000 per fortnight or $26,000 per year. Based on this scenario it’s estimated they’ll still have 71% net equity in their home after 20 years.

If there was no property price growth and the Pension Loan Scheme rate was 1% higher at 5.5%, then Michael and Sue could access the maximum payment rate for 12 years and have 17% net equity in their home after 20 years.

Case study provided by Pension Boost.  We assume property prices growth at 3% pa (last 25 years Australian property prices grew at 5.8% for homes, 4.9% for units) and the current PLS interest rate of 4.50% pa.  Age Pension and PLS rates effective 20 March 2021.

What is the Pension Loan Scheme interest rate?

At present, the interest rate for Pension Loan Scheme loans is 4.50% per annum.  This is comparably lower than the interest rates for reverse mortgages, which currently charge interest rates that are 0.45% to 1.15% higher than the Pension Loan Scheme interest rate.

Interest is added to the outstanding loan balance fortnightly until the loan is fully repaid, which usually occurs when the property is sold, or from the borrower’s estate.

How is the Pension Loan Scheme loan repaid?

Individuals can choose to repay their Pension Loan Scheme loan in full or part at any time without penalty. However it must be repaid when their property is sold, vacated, or after they pass away, as part of the winding-up of the estate.

If a surviving partner qualifies for the Scheme in their own right, repayment of the loan can be deferred until they pass away. If a surviving partner is not eligible for the Scheme, the loan must be repaid after the 14-week bereavement period.

If the individual wishes to sell a property that is used as security for the Pension Loan Scheme they will be required to repay the loan from the sale proceeds, or offer and have accepted a new property as security for the loan.

How do you apply for the Pension Loan Scheme?

Individuals can apply online for the Pension Loan Scheme via their myGov account.  They will need to complete an application form and provide relevant supporting documents.

There are also organisations that can take the time and hassle of applying and dealing with Centerlink, such as Pension Boost.

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