How the Pension Loans Scheme has changed

The Pension Loans Scheme has been expanded to include all people of Age Pension age with real estate in Australia.

How the Pension Loans Scheme has changed

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

Are you a fan of the Pension Loans Scheme? Are you eligible for an Age Pension? Do you know your rights? The PensionChecker™ tool has all the information you need.

This article first appeared in the March 2019 Retirement Affordability Index.

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    Financial disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.





    COMMENTS

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    thommo
    25th Jun 2019
    11:05am
    this scheme is called "eating your house" by any other name or description...
    Just increase the pension and don't be so damn stingy.
    GeorgeM
    26th Jun 2019
    1:53pm
    Exactly, an assured income source (with a great 5.25% interest compounding) for the Govt by eating up your house! As if cutting pensions in Jan 2017 wasn't good enough. A disgusting attack on your last remaining asset.
    sandymg
    25th Jun 2019
    11:19am
    What if the house you own is in a village where you pay rent for the land it's on? Are you eligible for this loan?
    patti
    25th Jun 2019
    11:20am
    I needed a cash injection to pay for some fairly major repairs to my home. So this scheme would not have helped me. I ended up going for a Reverse Mortgage, which I accessed a couple of years ago, before this new Pension scheme was announced. My only other option was to sell my house (probably at a loss, as I could not afford the repairs) and then I would have been looking for another place to live.
    john
    25th Jun 2019
    11:45am
    I'd think that every persons case is different, some may benefit from this loan set up, some may not, you'd have to weigh up all things.
    But with predictions coming out about the pension situation and how people will survive their retirement and super with enough money to enjoy their life, these schemes may be needed but they could never be rip offs, totally regulated, and of course someone has to pay them back.
    Then reverse mortgages' drops the value you would leave to your kids lets say. If the loans not paid off , it needs to be covered, when the will is read?
    So it would be better to introduce not just easy affordable loans, but also make the pension better , we are on the cusp of a big societal change in this country, we can get it right , or we can get it wrong, the wrong way will set us all up for quite a nasty reversal in living standards , for all.
    So its time to work out what happens to make life worth while for our older people, of which the majority deserve everything they need for their retirement.
    Sundays
    25th Jun 2019
    11:47am
    Definitely not a fan. I think it’s a trap. There is no lump sum and you are deemed when you try to save for capital repairs while paying 5.25% interest! Is this interest fixed? What happens if you have to move into aged care? What happens if you want to sell? Not means tested by Centrelink, but what if you need home services as you age, is it means tested then? Not every house worth $500,000 today will double in 20 years, so there won’t be that much left for your Estate. However, if that doesn’t bother you and you want the extra, I can see the attraction but more information is still needed.
    Cowboy Jim
    25th Jun 2019
    12:30pm
    Only good for people in expensive homes, we unit dwellers would be broke in no time flat. Janet seems to be in a good position, 70 years old, full age pension and a $500'000 house. Question remains - what does she need all the extra money for? I'd hit the prospective heirs for a bit of help towards my living expenses. That is how our family has handled it anyway, could even be written into the will and certified by a lawyer. 5.25% is a lot of dosh in today's low interest environment.
    Sundays
    25th Jun 2019
    12:44pm
    Yes, I have a friend whose 5 children all contribute and make her life more comfortable
    Paddington
    25th Jun 2019
    8:23pm
    Yes this sounds a better idea for sure. Government taking $150,000 in interest is disgusting. Children maybe putting in at birthday and Xmas for any big repairs or replacement of fridge or washing machine, that kind of thing, is a great idea.
    Ours do it now. It may not cover it all but it helps reduce the cost. Next is father’s day and birthday so a new iPad is needed. It is better than buying things that are not needed.
    Magic Touch
    26th Jun 2019
    8:02am
    That why i said the goverment are always taking advanage of old people to rip them off if there a chance..Why don,t the goverment get moneys from those big business. Not always heading for those retire hard working Australian.
    Older lady
    25th Jun 2019
    12:53pm
    Interest rate too high. If it was lower it would be more attractive. And many more people would be interested.
    tams
    25th Jun 2019
    4:05pm
    Answers for Sundays.
    Correct there is no lump sum.
    Interest is variable (currently 5.25% and has been since 1997, even with home loan rates at 8.5%) but the Minister is able to move rates either way.
    Loan is repaid from sale proceeds
    It was recommended by aged care/seniors advocates as a means for everyone to contribute to home care.
    It is not means tested, but the extension of making it available to all Australians of age pension age, opens it up for policy makers to make home care means tested, including the family home, and having PLS to contribute to the costs.
    $500,000 becomes $900,000 over 20 years at an annualised growth of 3%. What $250,000 property in 1999 is not worth at least $500,000 in 2019.
    We have two couples applying on 1st July - one self funded retiree couple wanting the full $54,000 per annum, and the other couple wanting the $18,000 per annum.
    We have received over 700 clicks to our PLS website in 20 days. This suggests there is a lot on interest
    Sundays
    25th Jun 2019
    7:30pm
    Thanks for the information tams. The Minister clearly is not interested in lowering the interest rate if it hasn’t changed since 1997. It should be linked to Reserve Bank rates. Lots of houses in mining and country town have not doubled in price.

    So, if I read you correctly, it is a means for people to borrow for their home care. At present, some home care is free for those on the OAP but will likely change if they own a home? Surely not, and if yes the Government should be up front about this. Including the family home in the Asset test by stealth. Also, home care is much more expensive if you go through an organisation instead of sourcing privately. I expect costs to rise with the introduction of this scheme.

    The SFR will be using it to manage their reserves and cash flows making it work for them. The pensioners will have to spend it, or be penalised by deeming on savings.

    There might be a lot interest but now I am even more sceptical. Let’s see the take up rate.
    tams
    25th Jun 2019
    4:05pm
    Answers for Sundays.
    Correct there is no lump sum.
    Interest is variable (currently 5.25% and has been since 1997, even with home loan rates at 8.5%) but the Minister is able to move rates either way.
    Loan is repaid from sale proceeds
    It was recommended by aged care/seniors advocates as a means for everyone to contribute to home care.
    It is not means tested, but the extension of making it available to all Australians of age pension age, opens it up for policy makers to make home care means tested, including the family home, and having PLS to contribute to the costs.
    $500,000 becomes $900,000 over 20 years at an annualised growth of 3%. What $250,000 property in 1999 is not worth at least $500,000 in 2019.
    We have two couples applying on 1st July - one self funded retiree couple wanting the full $54,000 per annum, and the other couple wanting the $18,000 per annum.
    We have received over 700 clicks to our PLS website in 20 days. This suggests there is a lot on interest
    tams
    25th Jun 2019
    4:05pm
    Answers for Sundays.
    Correct there is no lump sum.
    Interest is variable (currently 5.25% and has been since 1997, even with home loan rates at 8.5%) but the Minister is able to move rates either way.
    Loan is repaid from sale proceeds
    It was recommended by aged care/seniors advocates as a means for everyone to contribute to home care.
    It is not means tested, but the extension of making it available to all Australians of age pension age, opens it up for policy makers to make home care means tested, including the family home, and having PLS to contribute to the costs.
    $500,000 becomes $900,000 over 20 years at an annualised growth of 3%. What $250,000 property in 1999 is not worth at least $500,000 in 2019.
    We have two couples applying on 1st July - one self funded retiree couple wanting the full $54,000 per annum, and the other couple wanting the $18,000 per annum.
    We have received over 700 clicks to our PLS website in 20 days. This suggests there is a lot on interest
    Magic Touch
    25th Jun 2019
    4:26pm
    As a pensioner and with no cash for emergency it the only way when you need it.


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