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The new and improved Pension Loans Scheme

In the 2018-19 Federal Budget, the Government announced an expansion of the Pension Loans Scheme (PLS). Legislation has now passed through Parliament for the changes to come into effect on 1 July 2019.

The PLS, in its new format, allows qualifying Age Pension-age Australians who own property to take out a loan.

The loan is in the form of a fortnightly payment from Centrelink up to 150% of the maximum Age Pension rate. For a single person, this loan potential is about $36,000 per year, and for a couple, about $54,000. Full or part pensioners will be able to borrow the difference between their current Age Pension and the maximum 150% rate.

For example, a single age pensioner eligible for the maximum rate of pension of around $24,000 will now be able to draw up to $12,000 more each year as a loan, bringing total cashflow (as a combination of Age Pension and Pension Loans Scheme) to $36,000 per year.

The loan takes the form of a reverse mortgage in that the interest and the loan do not have to be repaid until the house is sold, although it can be repaid earlier. The loan is at a compelling rate of 5.25% (update, this was reeduced to 4.5% from 1 January 2020), which is less than commercial reverse mortgage interest rates (although the number of providers has fallen rapidly in recent years), and there are limits on how much can be borrowed based on age and the amount of home equity to be applied as security to the loan.

Key features of the PLS

Due to the way the PLS works, normal ways of thinking about a reverse mortgage do not apply. For example, eligible participants cannot withdraw a lump sum amount for an unexpected cost (as they can in a traditional reverse mortgage) because the amount is capped and trickles in through fortnightly payments.

Also, the Age Pension eligibility needs to be considered as it makes sense to run down savings to qualify for the maximum Age Pension before topping up with the PLS payments. For a single eligible Australian, the maximum asset level for a full pension is about $260,000, and for a couple it is about $390,000.

It’s all in the planning

The PLS will be become an important component in the planning of lifetime spending. Whether it is used or not, the fact that there is a potential source of cashflow that is supervised and administered by the government should provide some comfort to Australians in later life.

To understand how the PLS may fit in, it’s worth looking at the tools the government already provides for Australians in later life trying to work out how to manage their savings over time. The process needs to take into account investment earnings, Age Pension eligibility and the expected cost of living over a lifetime. The PLS should become a standard consideration in this process.

The Moneysmart Retirement Planner (MRP) is a government-sponsored tool that takes retirement savings and works out how much spending can be supported based on lifespan.

The ASFA Retirement Standard is the benchmark for the likely spending of Australians in later life. The result of a detailed study of the spending of older Australians, the ASFA Retirement Standard delivers an annual spending rate to deliver a ‘modest’ and ‘comfortable’ standard of living.

Put the two together and you get a starting number for how much is required for a comfortable retirement. The ASFA SuperGuru website suggests a couple will need $640,000 at retirement to spend at the ‘comfortable’ rate of $61,000 per year over a lifetime. Assets are run to zero by age 90.

The PLS adds a government-administered reverse mortgage component to this story. The couple who retire with $640,000 who were expected to limit spending to $61,000 per year, now have a little more flexibility with their cashflow over time.

For example, if they plan to spend $70,000 per year, would need to use the PLS at about age 78. Over the next 12 years, they would drawdown a total of $217,000, and the loan would be at $294,000 by the time they were 90 (taking into account interest and assuming they live that long).

They could also choose to use the PLS to supplement cashflow and maintain cash in the bank ready to address requirements as they arise. In the late years, the cost of aged care can be substantial and having funds at hand can offer comfort.

The Pension Loans Scheme and the ASFA Retirement Standard

The maximum rate of the PLS results in a cashflow almost exactly halfway between the ASFA ‘modest’ and ‘comfortable’ levels, as shown below. This provides a base case where homeowners with limited assets besides the home (subject to lending criteria) can secure a higher income.

  Single Couple
Max Age Pension $23,597 $36,015
ASFA Modest $27,648 $39,775
150% Max Age Pension $35,396 $54,022
ASFA Comfortable $43,317 $60,977

What is the right mix?

The perfect mix will vary based on the requirements of older Australians. A couple may like a larger reserve pool to provide for future care. With the average aged care Refundable Accommodation Deposit of $424,000 in metro Sydney, there is good reason to do this. Similarly, a single age pensioner may like a substantial reserve to have comfort that home care costs can be met.

Spending planning is complicated but PLS helps

For Australians in later life, planning spending, and taking into account government support is enormously complicated. While simplified models like the MoneySmart Retirement Planner help guide decisions, allocating spending over a lifetime is complex, and the implications of mismanaging the drawdown of savings can be stressful at a vulnerable stage in life.

The Pension Loans Scheme is a useful lever to help Australians manage their reserves and cash flow in the later stages of retirement. Financial advice that includes a thorough understanding of the Australian entitlement system is vital.

 

Brendan Ryan is a financial adviser and Founder of Later Life Advice. This article is for general information purposes only and does not consider the circumstances of any person.

18 Comments
Phil G Lear
December 21, 2020

What happens if there is already a mortgage over the asset, in my case some $164,000 ?
Does this need to be paid out before you can draw down on the equity of say $500,000 ?
Can I still apply for the PLS ?

Cheers Gordon

john
December 22, 2019

Hi Matthew. I missed the point re ""it is available to individuals who are not receiving the pension". Can you elaborate on that please ??

Graham
December 22, 2019

Hi John, there is some disagreement among advisers about eligibility for the PLS, and we will write an article in the new year after clearing it up with Centrelink (and whoever). For example, here is one view sent to us, not sure if it is correct:

"You can get the PLS if you are eligible for an age pension at $0 - i.e you are eligible to apply, but the scale of your assets mean no age pension for you. It’s very confusing syntax.

On this basis - you can actually borrow more than someone on the full pension - i.e you can borrow up to 150% of the age pension, as opposed to 50% if you are already getting the full age pension.

It’s a limited group that this may make sense for - e.g someone with assets generating low income return (e.g low yield investment property), or someone with high levels of income (e.g defined benefit), that needs more cash for living - and are assessable as being eligible for the age pension at $0 rate."

We'll come back on this.

john
December 22, 2019

Getting off topic a bit but dealing with centrelink is getting to the ridiculous stage. It is a time wasting, bureaucratic process for everyone on both sides and is outdated. Sooner a universal pension is introduced the better. Also the govt does not miss out on revenue because the normal tax rates apply and much of the bureaucracy is gone like many other countries !!

John Ball
July 14, 2019

Again, does anyone know when Centrelink actually starts moving? When does the money actualy start flowing?

Ray Dowling
July 13, 2019

I intend to take up this PLS as soon as possible. I agree that the 5.25% interest rate should be lowered in line with recent rate reductions by the reserve bank. The fact that interest is compounded every fortnight adds substantially, to the rate on an annual basis. I intend to pay the interest every fortnight to keep the loan at a manageable amount. At age 73 I will have borrowed approximately $200 k by the time I’m 90 which I believe is the age limit for the PLS.

John Ball
July 09, 2019

It sounds good, so I have applied. But not sure when the money starts to flow. My major thought is that the interest should be lowered. It is well above the new minimum RBA rates. Why?

Graham Hand
July 09, 2019

Hi John, the rate is higher than the 'new minimum RBA rate' of 1% because it is a loan, and writing a loan comes with some risks and admin costs. The rate does look high, though.

Graham Hand
August 14, 2019

Hi John, you have applied, why not call Centrelink and ask when the money will flow.
https://www.humanservices.gov.au/individuals/services/centrelink/pension-loans-scheme/how-apply

Peter Laurence
July 06, 2019

Once again the govt is ripping off the aged pensioners who now need that little bit extra each fortnight. 5.25% interest is outrageous. The rate should be set at about 1.5% above the RBA rate and move with the RBA rate. The extra spending by the recipients each fortnight would give the needed boost to local economies. We've paid our way and our taxes all our life, we've got the equity in our houses so now make it possible for us to enjoy our last years.

Craig
July 06, 2019

I wonder if the expanded pension loans scheme may be be the thin edge of the wedge that leads to the family home being included in assessable assets? If you lose age pension due to house being included you will then be offered the ability to replace it using the PLS.

Graham Hand
July 04, 2019

Hi Angela, yes, 5.25% is looking high in this market.

Dallas Achilles
March 15, 2019

Agree with Matthew. This product is far better than any reverse mortgage product currently available. Cost is negligible and there is no need to jump through hoops set by financial organisations. The Government, Seniors and the Community in general are all winners, as it’s a round about way for asset rich, income poor, seniors, to access the equity in their homes to fund their retirement.

Graham Hand
March 15, 2019

Hi Dallas, pointing out that the interest rate of 5.25% is not 'negligible' with short term rates around 1.5%.

Angela
July 04, 2019

Shouldn’t the Government reduce the interest rate by 50 basis points given the recent decline in RBA cash rate..much like they have suggested the Banks should?

Peter Stewart
March 14, 2019

A couple of key points that should be included.

PLS is an income stream reverse mortgage. The vast number of current Equity Release (reverse mortgage) borrowers have a lump sum or Line of Credit need. This will diminish the eventual take-up of PLS.


Brendan has good knowledge of aged care and it is important to understand that a Refundable Accommodation Deposit of $424,000 can be paid daily ($69). With most residents having an average of two years occupancy. a more realistic figure would be around $100,000. and include additional services fees.


The trend towards daily payments is increasing with 40% of residents now selecting this option. It is the aged care provider who are chasing lump sum payments.

If residents don't have enough, the amount accessed through PLS would be insufficient and an aged care loan (reverse mortgage)would be suitable

Technical Financial Planning
March 14, 2019

Hi Peter and Brendan,
Some great points.

I would just add a couple of points around use.

We need ASIC to sort out the issue whether discussion and advice around Pension Loans Scheme can only be provided by those who are licensed under an Australian Credit License. My understanding is that a significant majority under institutional AFSL may not be. If this is the case, this makes it very difficult for non ACL advisers to assist clients.

I think the Government has moved in the right direction with expansion of the PLS. As long as an informed decision is made, it only makes it retirees to enjoy cashflow by unlocking the equity of their home. Opening it to self-funded retirees who fail both income and assets test (as rare as that may be) and also allowing 150% of the Age Pension is helpful for retirees to receive income. Perhaps remotely related to the franking credit issue, it allows, should ALP’s proposal be legislated, to supplement income, if needed from their home - but yes coming at a cost of compounding interest of 5.25%.

From an aged care perspective, there are many clients, where all they have is the home and some nicks and backs. I would argue where the family’s wish is to retain the home for whatever reason, that PLS can assist with satisfying this wish as it allows cashflow to be unlocked. If nothing else, it allows breathing time before significant decisions in relation to the family home are made.

I would still argue that the family home above a certain limit should be assessable. Picking the figure arbitrarily, say $2 million. Home value above $2 million becomes assessable and if you don’t want that, Age Pension is recoupable from estate.

Matthew Collins
March 14, 2019

Thank you Brendan for this explanation, particularly your comparison to ASFA numbers. I really like this product and I think it will be very useful for many retirees who are property rich but cash poor. The fact that it is available to individuals who are not receiving the pension is also very interesting.

 

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