04 March 2019

Retirees may be able to more easily withdraw wealth stored in their home thanks to changes to the Federal Government’s Pension Loans Scheme.

A change in legislation, first announced in the 2018 federal budget, expands the existing scheme and has been welcomed by seniors’ advocates.

The current Pension Loans Scheme helps part pensioners by lending them money to top up their income to the maximum pension rate. It also is available to people who are not receiving a pension because of the income or assets test, but not both. People on the full age pension and 100 per cent self-funded retirees are currently excluded.1

Changes to the Pension Loans Scheme (PLS)

The new laws expand the Pension Loans Scheme, giving more people the option of borrowing against the value of their home to draw down fortnightly payments from Centrelink.

From 1 July 2019, any eligible Australian of pension age who owns a home can participate in the Pension Loans Scheme regardless of whether they would otherwise be eligible for a full pension, part pension or no pension.2

The maximum income that can be paid to retirees from the age pension and PLS combined will also increase to 150% of the full age pension rate.

The expanded scheme effectively makes the PLS available for more retirees.

The existing non-government reverse mortgage market has been shrinking in recent years as some operators consolidated and other quit reverse mortgages altogether.4

How the expanded Pensions Loan Scheme will work

Fortnightly repayments are made to supplement retirees’ income, with the payments and interest accumulating as a debt that can be repaid at any time.

The total amount that retirees will be able to receive from the expanded scheme will depend on their age, the value of their home, whether they are a single or couple, how long they plan to receive payments and how much age pension they receive.

The government said the interest rate would be the same as the current PLS interest rate of 5.25% per annum.

It could also be a handy income top-up for self-funded retirees not wanting to take out a traditional reverse mortgage.

Income paid by the PLS is not taxed and generally not subject to the assets or income test, although if PLS payments are saved they could be means tested.

Janet case study income boost Full rate single pensioner with $400,000 property

Janet is a 70 year old single maximum rate age pensioner with a house valued at $400,000. Her Age Pension income is currently $908 per fortnight ($23,598 per year). Under the expanded PLS, Janet is now able to access some of the value in her home.

Janet chooses to receive an additional income stream of around $6,000 in the first year. Her income increases to $1,135 per fortnight ($29,497 per year), 125 per cent of the maximum rate of the Age Pension. The value of the income stream increases over time in line with the indexation of the pension.

Janet continues to draw down a PLS income stream for 20 years at an interest rate of 5.25 per cent. Janet passes away at age 90. Her family sell her house for $750,000. The PLS loan owed to the Government has increased to around $300,000, which is paid from the house sale proceeds. Around $450,000 remains in her estate. Over the 20 years, Janet receives around $170,000 in additional income to support her standard of living in retirement.

Bob and Sue case study income boost Full rate pensioner couple with $850,000 property

Bob and Sue are a 70 year old maximum rate pensioner couple, with a house valued at $850,000. Their combined Age Pension income is currently $1,368.20 per fortnight ($35,573 per year).

Under the expanded PLS, Bob and Sue are now able to access some of the value in their home. They choose to receive $2,052 per fortnight ($53,360 per year), the full amount of 150 per cent of the maximum rate of the Age Pension. The value of the income stream increases over time in line with pension indexation.

Over the next 20 years, Bob and Sue receive a PLS income stream at an interest rate of 5.25 per cent. After 20 years, Bob and Sue sell the house for $1.6 million. While the balance of the PLS loan owed to the Government has grown to around $900,000, Bob and Sue pay out this balance from the sale proceeds and retain $700,000.

Over the 20 years, Bob and Sue receive around $500,000 in additional income to support their standard of living in retirement.

Case studies sourced from Budget 2018-19 fact sheet: expansion of the Pension Loans Scheme www.budget.gov.au/2018-19/content/factsheets/download/preparing-finanacially.pdf

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1 Department of Human Services: Pension Loans Scheme. Accessed 21 May 2018.
2 Media Release 14/2/19 – The Hon Paul Fletcher MP, Minister for Families and Social Services’
3 Advice fees may apply. Refer to the Financial Services Guide for more information.
4 IBISWorld: Reverse Mortgage Providers - Australia Market Research Report. Published October 2017
5 COTA Australia announcement. www.cota.org.au/news-items/media-release-federal-budget-2018-welcome-commitment-better-planning-ageing-population-aged-care/