Currently 1.8 million Australian homeowners receive some level of age pension, with around 700,000 on a part pension.
What many of these part-age pensioners may not know is that, along with recipients of the disability support pension, carer payment and some other Centrelink payments, they are able to access some of the equity in their home through the Pension Loan Scheme (PLS).
What is the PLS?
The PLS provides a type of reverse mortgage that is aimed at supplementing retirement income.
- It is paid in the form of a regular fortnightly payment from Centrelink. Payments are not taxable.
- The maximum payment is the difference between the amount of actual pension received and the current rate for a full pension.
- The interest rate is 5.25% per annum. This is significantly lower than the rates charged by most lenders and has not changed since 1997.
- The loan can be secured against your home or an investment property.
- A PLS loan can be partly or fully repaid at any time. Although not required, typically, the loan is only repaid when the property is sold. The value of the loan therefore increases due to the regular payments made to the pensioner and the growing interest amount.
- The total amount the pensioner can borrow depends on the equity they have in their home; how much of this equity he or she wants to retain; and their age (or the age of the youngest member of a couple).
Pros and cons
The obvious advantage of the PLS is that it provides a supplementary ‘income stream’ to support quality of life in retirement.
The big downside is that the amount of the loan increases exponentially over its lifetime. This can significantly decrease the ultimate value of the estate passed to beneficiaries.
The PLS only provides fortnightly payments within the set limits. If you need a lump sum, say to pay for modifications to your home, a reverse mortgage may be more appropriate.
The PLS in action
Des is 67, widowed, and has no children. He owns a home valued at $750,000 and a very comfortable beach house he regularly escapes to, which hasn’t left much in the bank. He is the epitome of “asset rich, cash poor”. He receives a part pension of $250 per fortnight (pf) but he wants to enjoy life a bit more. As the maximum age pension is $908pf[1] Des could receive up to $658pf extra under the PLS. This is more than he needs, so he opts for payments of $500pf.
Des maintains the same rate of payment for the next ten years. Over that time he receives a total of $130,000 in additional ‘income’ from the loan. However, his outstanding loan balance after ten years is $171,594. That means he has racked up an interest bill of $41,594. If Des sold the house at this ten-year mark, he would need to repay the full $171,594 from the proceeds.
That may sound like a lot, but if his house was worth $750,000 when he took out the loan, and if it increased in value at a rate of 7% pa over the ten-year period, it could be worth just under $1.5 million.
Potential changes
In the 2018 Federal Budget the government proposed expanding the PLS to all Australians of age pension age, including self-funded retirees and full pensioners. The maximum amount of the combined pension plus the PLS income stream would be increased to 150% of the age pension rate. If these changes are legislated it will open up the scheme to many more people and allow them to take out bigger loans.
Seek advice
Taking on any type of debt, particularly later in life, needs to be approached with knowledge and caution. PLS loans are subject to a number of eligibility criteria, and both the positives and negatives must be considered.
Your financial adviser is ideally placed to help you understand how the PLS works, and if it is appropriate for you and your family.
[1] Including supplements