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With interest rates at rock bottom and investment markets continuing to be volatile, many retirees are looking for ways to boost their retirement income.
If you’re eligible, the federal government’s Pension Loans Scheme (PLS) could be a worthwhile option to boost your regular retirement income or pay for expenses like home care.
So, check out SuperGuide’s detailed guide to how the PLS works.
What is the Pension Loans Scheme?
The PLS is a reverse mortgage style loan offered by the federal government that allows borrowers of Age Pension age to receive a tax-free fortnightly income stream by taking out a loan against the equity in their home.
Although the PLS has been around for about 30 years, few retirees know about it and even fewer have used it. This was largely due to some fairly restrictive eligibility rules.
But all that changed from 1 July 2019, when new rules expanded its eligibility criteria and withdrawal amounts.
How does the PLS work?
Note: The original interest rate quoted in these case studies was 5.25% (the PLS interest rate at the time of publication). This has been updated to 4.5% to reflect the PLS interest rate applying from 1 January 2020.
How much can I borrow?
You can choose any amount for your PLS loan up to the maximum loan amount, which is the total loan you can access under this scheme.
Your (or your partner’s) age and how much equity you own in Australian real estate determines the size of your maximum loan amount.
The maximum loan amount generally increases each year as you or your partner get older and the value of your property increases. As the value increases, your maximum loan amount also increases and if it decreases, your maximum loan amount also decreases.
The fortnightly loan payments stop once your loan balance reaches your maximum loan amount. Interest, however, continues to be added to the outstanding balance until the loan is repaid.
How to calculate the maximum loan amount
The maximum loan amount is calculated using a formula:
Age component amount multiplied by value of real estate** divided by $10,000
Example: A 70 year old single person offers a property valued at $180,000 as security for the loan but wishes to retain equity of $80,000. The maximum loan is calculated as follows:
$3,080 multiplied by ($180,000 minus $80,000, divided by $10,000) = $30,800
*The age component amount is defined in the Social Security Act, Subsection 1135A(3).
**The value of the real estate is rounded down to the nearest multiple of $10,000.
Click the button below to see the Age component amount for your current age, or use the calculator below.
Age Component Amount
|Current age||Age component amount|
|55 or younger||$1,710|
|90 or older||$6,750|
Source: Services Australia
Maximum loan calculator amount calculator
The calculator below will estimate your maximum loan amount based on your age and real estate security for the loan.
Select your age and enter the amount you wish to use as security.
10 key facts about the new Pension Loans Scheme
Here are 10 important points you need to know about how the Pension Loans Scheme (PLS) operates from 1 July 2019:
1. Who is eligible?
Under the PLS rules, all Aussies who reach Age Pension age are able to apply for a PLS loan if they meet all the following eligibility criteria:
- You or your partner are of Age Pension age and meet the Age Pension residency rules (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 get – 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 provide real estate as security for the loan (see Point 6).
- You must not be bankrupt or subject to a personal insolvency agreement.
2. Payments are a nominated amount
You are allowed to choose your fortnightly loan payment amount, up a maximum of 150% of your maximum pension entitlement (including supplements). This means:
- Full Age (or other qualifying) Pensioners can borrow up to 50% of the maximum rate of the fortnightly pension payments (including supplements).
- Part Age (or other qualifying) Pensioners can withdraw fortnightly payments up to a maximum of 150% of the full Age Pension less the amount of their current fortnightly pension payments (including supplements).
- Self-funded retirees can borrow up to 150% of the fortnightly full Age Pension.
PLS borrowers can choose any payment amount up to the 150% full Age Pension threshold.
3. No lump sums
Income from a PLS loan is received as a regular income stream and you can choose the amount you receive each fortnight, up to 150% of your maximum pension rate.
Unlike normal, commercial reverse mortgages, lump sums are not available under the PLS.
4. Loans are from the government
The PLS is administered by Services Australia and eligible retirees receive the loan payments from the federal government.
Payment amounts received from a PLS loan are non-taxable.
5. Age-based limits apply
The amount you can borrow under the PLS is limited so you do not end up owing more than your home is worth. Your maximum loan amount is limited by:
- Your age and, for couples, the age of the younger spouse or partner at the time the loan is granted
- How long you intend to receive payments
- Whether you are single or partnered
- The value of your home
- How much equity you have in the property and any amount of equity you wish to exclude from the loan.
6. Real estate is needed as security
To qualify for a PLS loan, you or your partner must have equity in a property you can use as security for the loan.
The property can be your own home, an investment property or farmland but it must be located in Australia. The real estate can be owned by a company or trust, but either you or your partner must be an attributable stakeholder of the company or trust.
Services Australia may accept property in a retirement village as security if you or your partner’s name is on the freehold title, you are not contractually prevented from selling the property, and you or your partner’s estate control the distribution of the asset.
With a PLS loan, you can choose how much of your real estate value you want to use as security.
You also require adequate and appropriate insurance cover to protect the real estate asset you are using to secure your PLS loan.
7. Low interest rates
At present there is a lower interest rate (4.5% per year compound) for PLS loans than for comparable reverse mortgages.
|Date of effect||Interest rate|
|1 January 2020 to present||4.50%|
|25 December 1997 to 31 December 2019||5.25%|
|20 March 1997 to 24 December 1997||6.25%|
|10 July 1996 to 19 March 1997||7.90%|
Source: Social Security Guide 10 August 2020, Australian Government.
Interest is added to the outstanding loan balance fortnightly until the loan is fully repaid, which normally occurs when the property is sold, or from the borrower’s estate.
8. Repayable at any time
PLS loan debts can be repaid in full or part at any time, however, they are generally repaid when the home used as security is sold, usually as part of the winding up of your estate.
9. No Age Pension impact
Fortnightly PLS payments are not counted towards the Age Pension income test. The only exception is if you save your PLS payments rather than spend them, which could result in the saved amount being means tested under the assets test.
Although normal reverse mortgages can affect the amount of Age Pension you receive because an income stream is assessed under the income test, PLS payments are not counted.
10. Few fees
There are no establishment or monthly account fees with a PLS loan, which compares with around $1,000 for a normal home loan mortgage. Services Australia may, however, charge costs (including legal fees).
Setting up a PLS 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.
Costs are determined after the loan application is made and can be paid immediately, or they can be added to the outstanding loan balance.