Pension Loans Scheme gets a makeover, but is it enough?

The federal government’s Pension Loans Scheme (PLS) was created almost 40 years ago to help boost retirement income. In the 2021 Federal Budget, an important change was announced to answer one of the criticisms of the scheme.

The scheme allows older Australians to receive a non-taxable fortnightly loan to supplement their income.

This option allows recipients to choose the amount of the loan – up to the maximum loan amount – but the money won’t be paid as a lump sum and the loan and all costs and accrued interest must be repaid. Repayments can occur at any time.

To be eligible for the PLS

  • you or your partner are of Age Pension age and you meet the Age Pension residency rules (i.e. you live in Australia and are an Australian citizen, permanent resident and/or special category visa holder for at least 10 years, including five years of continuous residence)
  • you must be receiving – or qualify to receive – a qualifying pension (including those who are maximum-rate pension recipients). You are still eligible for the PLS even if you have a payment rate of $0 for either the income or assets test. Qualifying pensions include: Age Pension, Carer Payment, Disability Support Pension
  • you or your partner must own real estate in Australia that you can use as security for the loan and have that real estate properly insured
  • you must not be bankrupt or subject to a personal insolvency agreement.

How much can you get?
How much you are eligible for will depend on your age and how much equity you own in your Australian real estate.

The maximum loan amount generally increases each year as you or your partner get older.

Changes to the value of the real estate you use as security will also affect your maximum loan amount. If the value increases each year, your maximum loan will also increase. If the value decreases, then the maximum loan will decrease.

You can get up to 1.5 times the maximum payment rate of the pension each fortnight, although you are not required to borrow the maximum amount each fortnight.

The PLS charges an annual interest rate of 4.5 per cent that compounds fortnightly on the outstanding loan balance. The longer you take to repay the loan, the more interest you pay.

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Delivering the 2021 Federal Budget, Treasurer Josh Frydenberg announced that from 1 July 2022, the government would introduce a ‘no negative equity guarantee’ for PLS loans and allow people to access a capped advance payment in the form of a lump sum.

A ‘no negative equity guarantee’ will mean that borrowers under the PLS, or their estate, will not owe more than the market value of their property, in the rare circumstances where their accrued PLS debt exceeds their property value. This brings the PLS in line with private sector reverse mortgages.

In another change, eligible people will be able to receive a maximum lump sum advance payment equal to 50 per cent of the maximum Age Pension.

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Based on current Age Pension rates, this is around $12,385 per year for singles, while couples combined could receive around $18,670.

A maximum of two advances totalling up to the cap amount are permitted in a year, for those who do not want to take an advance in one instalment.

What can you use as security?
You can only use real estate in Australia as security for your loan.

It can be the home you live in or an investment property you or your partner own.

It can also be real estate owned by a company or trust. Either you or your partner must be an attributable stakeholder of the company or trust.

Property in a retirement village can be considered as security if:

  • you or your partner’s name is on the freehold title for the property
  • there isn’t a contract term that prevents or limits your ability to sell the property
  • you or your partner’s estate control the distribution of the asset.

What are the costs?
There are no establishment or monthly account fees with a PLS loan. Services Australia may, however, charge costs (including legal fees).

Setting up a loan requires a valuation of your property by a licensed valuer, but you will not pay this cost. You will, however, have to pay any costs associated with registering and removing the charge or caveat Services Australia will place on your property’s title deeds.

The history
The PLS was created in 1985 when the Hawke government reintroduced an assets test for pensions. It was first proposed by a panel headed by Professor Fred Gruen.

The panel recommended an assets test that included the pensioner’s home. In doing so, it recognised that an assets test could disadvantage people with assets that were difficult to sell, either because there were few buyers or for “social or psychological reasons”.

To deal with that problem, the panel proposed setting up a scheme that would allow people to receive a ‘pension-sized’ amount as a loan that could be recovered from their estate.

The criticism
The scheme has failed to attract much interest, despite changes in 2019 that allowed self-funded retirees to access the scheme and an increase in the amount that can be borrowed.

Paul Rogan, the founder and chief executive of Pension Boost, a company dedicated to helping people access the PLS, welcomes the changes to the system, saying it will allow retirees to live in their homes for longer.

However, he says more changes are needed.

1. Change the name. Mr Rogan says Australians fixate on the word pension in the title, which results in many believing the scheme is available only to age pensioners. He suggests changing the name to the Seniors Loans Scheme.

It’s an idea the government appears to be considering with social services minister Anne Ruston admitting post-Budget that “the name has mistakenly led people to believe self-funded retirees don’t have access to it, which is not the case.”

“I think it [the name] could be improved,” she said, “and self-funded retirees haven’t picked it up anywhere near the level you think that they might like to.”

2. Spread the word. Mr Rogan also says more money needs to be invested in educating older Australians about the existence of the scheme and its benefits.

“Many retired baby boomers have most of their capital in their homes but hold a limited amount of superannuation,” Mr Rogan says. “The majority have access to some Age Pension and do not want this put at risk.

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“In coming from a position of caution, many are overlooking the benefits to them of the Pension Loans Scheme.

“With more than 1.8 million age pensioners owning their own homes, the potential to top up their income without affecting their Age Pension eligibility is significant.”

3. Cut the interest rate. The interest rate for accessing the scheme should be reduced and independently benchmarked to the RBA official cash rate to improve transparency, Mr Rogan says. The PLS interest rate was last cut from 5.25 to 4.5 per cent in December 2019.

What the government says
The Department of Social Services responded by telling YourLifeChoices that the government was focused on providing older Australians with choice in retirement.

A spokesperson said: “Last year, we reduced the (PLS) interest rate to 4.5 per cent, which is well below similar commercially available schemes that range between 4.95 per cent and 5.60 per cent.

“In the 2020 Budget, the government committed $9.6 million to improve digital service delivery to make it easier for retirees to access.”

Traditional mortgages are repaid gradually throughout the term of the loan, says the DSS spokesperson, but with the PLS, the principal amount and interest are paid only when the loan is recovered, which typically occurs when the linked real estate asset is sold. Therefore, the PLS is not comparable to a standard mortgage product.

Do the changes to the PLS make it more attractive to you? Is the interest rate a problem?

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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.

Janelle Ward
Janelle Ward
Energetic and skilled editor and writer with expert knowledge of retirement, retirement income, superannuation and retirement planning.
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