April 17, 2019
What is it?
The Pension Loan Scheme (PLS) is a voluntary reverse equity mortgage provided by Centrelink. This scheme offers older Australians an income stream in the form of a loan to supplement their retirement income.
Who can currently get it?
Currently part-pensioners and some self-funded retirees who own a property in Australia can access the PLS. It is available to those who are not entitled to the maximum rate of pension, or any pension, because of the Income Test or Assets Test (but not if they are ineligible under both tests).
How does it work?
Under the scheme, individuals who are of pension age can obtain a loan (secured with real estate owned in Australia) to increase their fortnightly pension payment from a part-rate or nil rate, up to the maximum pension rate. The additional “top up” payments are exempt from both social security and age care assessment and are also tax-free.
All costs associated with establishing and finalising the loan, including legal costs, are covered by the income support recipient. These costs can be paid upfront or added to the loan balance. Interest charged (currently 5.25 per cent) on the outstanding loan balance is compounded and is applied each fortnight.
1 July 2019 Changes
From 1 July 2019, eligibility for the PLS will be expanded to include all Australians of pension age even if they are currently receiving the maximum rate of pension. The scheme will now also include those who fail both the Income Test and the Assets Test. Importantly, the loan amount that an individual can receive will be increased to 150 per cent (from 100 per cent) of the maximum pension rate.
Those who are receiving payments under the PLS, but are ineligible for any means tested income support, will not receive ‘fringe benefits’ such as concession cards or other payments that may be available to income support recipients.
How much can I get?
Centrelink will determine maximum amounts that it will advance. While the overall maximum amount of “top-up” payments will be 150 per cent of the maximum pension rate, the actual limit will depend on other factors including your age, how long you intend to receive payments, if you are single or partnered, the value of your home and the rate of pension receivable. These restrictions should ensure that people do not have to pay back more than their home is worth.
The outstanding loan balance consists of the principal loan amount, accrued interest and outstanding costs, less any repayments made.
The loan must be repaid when the property is sold or on death of the recipient.
Is it suitable for me?
The PLS provides ongoing fortnightly payments for a short or indefinite period. You cannot receive a lump sum payment under this scheme. This means that this option may not be suitable for those who have lump sum needs or who have access to other means of funding retirement expenses.
When this scheme is being considered, it is important to be fully aware of the possible consequences now and also in the future. These may include the compound impact of interest charges in the long-term, the impact of the arrangement on the borrower’s estate and beneficiary entitlements.
There may be other more suitable ways of funding retirement living, including reverse mortgages, downsizing, borrowing from family/friends or selling the home.
If you would like to discuss your specific situation, please feel free to email us on firstname.lastname@example.org or give us a call on 07 4638 2081.