Boosting your retirement income

Retired actuary and author John De Ravin knows a thing or three about personal finance. He also knows our retirement income system can be complex and, to help, has written a book for pre-retirees and retirees. In this extract from Slow and Steady: 100 wealth building strategies for all ages, he explains how you can access additional income through the Pension Loans Scheme – and whether that strategy is right for you.

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Read this strategy if:

  • you receive a part Age Pension
  • you own your own home, without a mortgage (or only a very small mortgage)
  • you would like to use the equity in your home to obtain a regular income to improve your current lifestyle
  • you are prepared to accept that the Pension Loans Scheme (PLS) will mean a somewhat smaller estate will pass to your beneficiaries.

Background
Some older Australians who receive part (or no) Age Pension have substantial assets, including both their own home (which is exempt from the Age Pension assets test, no matter how valuable the home might be) and possibly low-yielding assets outside the family home.  If you are in this position, you may prefer to have some additional income to support your lifestyle. Of course, if you have additional assets other than your own home, you may be able to dispose of some of your assets to meet the additional costs. But sometimes there may be reasons why you do not wish to do so: for example, the main asset outside the home may be a single large asset (such as an investment property), which you do not wish to dispose of, or selling that asset might realise a large capital gains tax (CGT) liability.

Basically, the PLS allows you to ‘borrow’ the difference between your actual Age Pension entitlement and the maximum Age Pension. If you participate in the Pension Loans Scheme, the maximum amount you will receive fortnightly (pension and loan combined) is 150 per centDid of the maximum pension to which you would have been entitled but for the means tests (income test or assets test). But the additional pension is not a gift from the government; rather it is a loan that will accumulate with interest until either you decide to repay the loan (perhaps because you finally decide to sell some other assets) or until your home is disposed of after you pass away (when the loan and any accumulated interest will be repaid to the government out of the proceeds of the sale of the property).

How to do it
The PLS is only available to those who:

  • are of Age Pension age
  • are eligible to get a qualifying pension (Age Pension, Carer Payment or Disability Support Pension)
  • have equity in a property (as a mortgage on the home will be the security for the loan provided to you by the government)
  • have adequate and appropriate insurance covering the real estate offered as security
  • are not bankrupt or subject to a personal insolvency agreement.

Effectively, the PLS allows you to receive payments of up to 150 per cent of the maximum amount of the Age Pension. The maximum amount of loan that you can access depends on the amount of equity you have in the property you are offering as security and your age at the time when your loan application is assessed.

The loan advances are made fortnightly. 

You can make repayments at any time. However, when you sell your property you must repay the loan. If you pass away, the loan will be repaid when the property is disposed of, unless you have a surviving spouse who continues to live in the property (then, if your surviving spouse continues to live in the property after you die, the loan will be repaid when your spouse passes away).

You do not have to pay for the valuation of the property, but you do pay for the registration of the mortgage over the property and also the fee for releasing the mortgage is paid by you or your estate.

Unlike other forms of reverse mortgage, the PLS does not offer a ‘no negative equity guarantee’ so, in principle, Centrelink would be entitled to recover any excess of the accumulated loan amount when your property is sold over the proceeds available from the sale of your property (if you, or your estate, have other assets at the time your property is sold).

The steps in accessing the PLS are as follows:

  • register an intent to claim.
  • obtain a claim form available from a Services Australia service centre – you can ring 132 300 or visit your nearest service centre.
  • obtain a real estate details form.
  • Services Australia will arrange an appointment for you with a Financial Information Service Officer to discuss the terms of the loan to make sure it meets your needs.
  • complete the claim form and real estate details form and lodge your application.
  • Services Australia will inform you whether your application was successful and, if so, will write you a letter informing you of the amount of the fortnightly top-up payments and the starting date.

What does it mean for you financially?
The interest rate payable on the loans since 1 January 2020 is 4.5 per cent. This is well above the average interest rate that creditworthy customers on average pay on standard mortgage loans. However, it is lower than the rates on offer under reverse mortgage loans that carry a ‘no negative equity’ guarantee. So, if you have decided to borrow to supplement your current income, are eligible for the PLS, the fortnightly payment of the loan advances suits you and the amount that you can access from the PLS is sufficient to meet your needs, this is a good way to supplement your existing income.

Factors to take into account before you decide
Obviously, the PLS is only an option, if you meet the eligibility requirements.

You cannot borrow a lump sum from the PLS; the scheme only allows fortnightly payments, and only payments that (combined with any pension entitlement) would not exceed 150% of the maximum Age Pension amount. So, if you need payment to be made as a lump sum, other options might be more suitable such as a reverse mortgage or the sale of a proportion of the equity in your home.

Also you might want to consider the effect that the loan will have on the equity in your home, which you might otherwise want to use for part of your Refundable Accommodation Deposit (RAD), if you ever need to move into a residential aged care facility (nursing home) or to leave as a bequest to family members, friends or charity. Over time, the result of compound interest will be to increase the accumulated balance of the loan that must be repaid when your property is sold.

The PLS has not been widely taken up. Presumably that is because of the constraints in the scheme (you can’t borrow a lump sum, you can never get more than 150% of the maximum Age Pension, and many of those who still have assets would probably choose to dispose of the assets to fund lifestyle rather than to borrow against a property). Nevertheless, if those constraints do not deter you, the PLS is a much better option for funding lifestyle than credit cards, which are typically much more expensive and usually have a relatively small credit limit, and may arguably be a better option than a reverse mortgage, which is likely to be a little more expensive (though to be fair, reverse mortgages do offer a ‘no negative equity guarantee’, which the PLS does not).

Have you used the PLS? Did you find the process easy to navigate? Did you achieve the desired result?

Slow and Steady is available from John De Ravin’s website for $39.95.

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Written by John De Ravin

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