Can the Pension Loans Scheme give you peace of mind?

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.

The 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 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.

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, founder of retirement specialist provider Pension Boost, believes there are still too many barriers to the scheme and is seeking five key changes to make it more accessible and transparent. 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.

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. “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. Lump sum. Mr Rogan also wants the scheme to allow a one-off upfront payment for larger expenses. Permitting a one-off lump sum payment would allow retirees to access the scheme for home repair and maintenance costs, or buy a new car that their retirement savings would not allow for, he says. 4. Better protection. Commercial reverse mortgage providers have been required to provide a ‘no negative equity guarantee’ since 2012, and Mr Rogan believes the PLS should be subject to the same guarantee. 5. 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 most recent 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.

DISCLAIMER: All content in the Retirement affordability Index™ 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.