What are the rules?
The Pension Loans Scheme (PLS) has been expanded to include all eligible people of age pension age who have securable real estate owned in Australia.
The amount that can be borrowed, via a fortnightly loan, will increase to 150 per cent of the fortnightly Age Pension.
This means that full rate pensioners will be able to increase their annual income by up to $12,040.50 (singles) or $18,150.50 (couples) – based on the current rate of the Age Pension – by unlocking the equity in their home.
How much can you borrow?
The full details are yet to be revealed, but the Government states that the current PLS actuarially calculated formula, which limits the cumulative amount of loan plus interest that can be borrowed, will continue to apply. While the overall maximum you can receive is 150 per cent of the maximum rate of the Age Pension, your actual limit will depend on your age, how long you intend to receive payments, whether you are single or have a partner, the value of your home and how much Age Pension you receive. The formula is conservative to ensure participants do not borrow more than their home is worth.
How much will this cost you?
The current scheme interest rate of 5.25 per cent per annum will apply to existing and new loans. Participants have the flexibility to start or stop receiving payments as their personal circumstances change, and generally repay the loan once the asset (usually the family home) is sold or from their estate. They can repay earlier if they choose.
Will your PLS be taxed or means tested?
Income streams from the PLS are non-taxable and generally not means tested. However, if you save PLS payments, rather than spending them, the saved amount could be means tested.
Who will use this scheme?
Currently, around 1.8 million age pensioners own their home, including 1.1 million maximum rate age pensioners and 700,000 part-rate age pensioners.
To date, uptake of the PLS has been minimal – largely because full age pensioners and self-funded retirees are excluded. From July, the Government expects up to 6000 retirees will take up a loan in the first three years.
Case study: Janet (single age pensioner)*
Janet is 70 and has a house valued at $500,000. She receives a full Age Pension of $926.20 per fortnight ($24,081 per year). Under the expanded Pension Loans Scheme, Janet is able to access some of the value in her home.
She chooses to receive additional funds of around $12,040.50 in the first year. Her income increases to $1389.29 per fortnight ($36,121.50 per year) – 150 per cent of the maximum rate of the Age Pension. The value of the loan funds increases over time in line with the indexation of the pension.
Janet continues to receive additional funds through the PLS for 20 years at an interest rate of 5.25 per cent. She passes away at age 90. Her family sells her house for $950,000. The PLS loan owed to the Government is around $600,000, which is paid from the sale of the house. About $350,000 remains in her estate. Over the 20 years, Janet received around $350,000 in additional income.
*Supplied by Australian Government, Department of Social Services
This article first appeared in the March 2019 Retirement Affordability Index.