Pension Loans Scheme: Where it fails and how it can be fixed Australians can supplement their retirement income through the Pension Loans Scheme. Janelle Ward and Ben Hocking explain the scheme and retirement specialist Paul Rogan tells what needs to change.
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he federal government’s Pension Loans Scheme (PLS) allows older Australians to receive a non-taxable fortnightly loan to supplement their retirement 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 12
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. Unlike commercial reverse mortgages, lump sums are not available under the PLS.
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.
YourLifeChoices Retirement Affordability Index™ May 2021
