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Aged Care featured heavily in the 2021 Federal Budget, with several measures aimed at improving the overall system for both home care and residential care users.
In a positive attempt to address the neglect identified by the Aged Care Royal Commission and the need to transform the industry, the Government announced a raft of improvements to the transparency and availability of services including funding for an additional 80,000 Home Care Packages.
A further measure aimed at helping people to remain living in their own for as long as possible, was significant change to the Pension Loan Scheme (PLS).
What is the Pension Loans Scheme?
The Pension Loans Scheme (PLS) is a reverse mortgage style loan, offered by the federal government and administered by Centrelink, that allows borrowers of Age Pension age to turn equity in their home into a regular income stream.
From 1 July 2022 retirees will be able to take some of equity released from their home as a small lump sum. The Government will also bring the scheme in line with commercial reverse mortgages with a no negative equity guarantee, ensuring that borrowers can never end up owing more than the value of their home.
Those closest to the scheme can see room for further improvements – including a name change and a lower interest rate on the debt. In the meantime, they see it as playing an important role in helping people age in their own home.
Supplementing Home Care Packages with the PLS
One potential use of the PLS is to supplement a Home Care Package, or to act as a stop-gap until one is delivered.
Home Care Packages provide eligible older individuals with limited funding to buy goods or services needed to keep them in their own home, but they aren’t always sufficient.
The size of the package is supposed to reflect a person’s care needs but the most a person can receive, before basic and income-tested care fees and provider fees, is $55,768 a year.
There are four home care package levels, starting at level one with $12,475 a year up to level four with $55,768 a year.
This potentially translates to between two and 12 hours help a week depending on the services required. If daily personal care is required or costly equipment such as a wheel chair, the package can quickly be depleted.
There are currently about 100,000 people on a national waitlist for a Home Care Package. While the additional 80,000 packages will help reduce this number, it will take time to roll them out and not everyone will get a package at the level they need.
Once they have been assessed by the Aged Care Assessment Team as being eligible, it is not uncommon for people to wait 12 months for a Home Care Package
For people whose income is already stretched, the PLS could help fund home help while they wait for a Home Care Package to be allocated. It could also meet additional living expenses or pay for care in addition to the services covered under a package.
How much income does the PLS offer?
Currently, the PLS allows you to choose your fortnightly loan payment amount, up to a maximum of 150% of your maximum pension entitlement (including supplements). This means:
- Full Age Pensioners can withdraw up to 50% of the maximum rate of their fortnightly pension payments.
- Part Age Pensioners can withdraw fortnightly payments up to a maximum of 150% of the full Age Pension less the pension amounts they receive (including supplements).
- Self-funded retirees can borrow up to 150% of the fortnightly full Age Pension.
For example, a single person who receives a part-Age Pension of $400 per fortnight could borrow up to $1,029 per fortnight ($26,755 per year) to bring their payments up to 150 per cent of the maximum single Age Pension.
The following example shows how regular income from the PLS can help eligible retirees pay some of the costs of a home care package and other care needs.
What about lump sums?
A significant extension to the scheme, starting 1 July 2022, is the ability to access up to two lump sum advances (within any 12-month period).
These lump sum advances will be capped at 50 per cent of the maximum annual rate of age pension and count towards the 150 per cent overall cap.
Based on current rates, this would allow a single person to receive lump sum payments up to $12,380 per year and $18,670 combined for a couple.
The introduction of these advance lump-sum payments is expected to increase the attractiveness of the PLS which to date has only been accessed by about 4000 people.
It would give people the flexibility to pay for large one-off expenditures such as replacing a car, making home improvements or renovations, or to pay for aged care services.
Can I lose my home?
There are two concerns many people have about equity release loans, the first being what happens if the loan someone takes out is more than the value of the property.
As part of its recent Budget announcements, the government also introduced a No Negative Equity Guarantee for PLS loans from 1 July 2022.
The guarantee, which is mandatory for commercial reverse mortgages, ensures that borrowers will not have to repay more than the market value of their property.
This reassurance will also help people’s decision making if they are unable to keep a loved one at home forever and they end up having to move into residential aged care. Once there, they may be required to pay a refundable accommodation deposit or daily costs higher than their pension or other income can cover. To cover the gap, they could tap into the PLS for additional income.
The second concern is around inheritance and whether there will be any equity left for the next generation.
This remaining home equity available to the homeowner’s estate will depend on factors including:
- The market value of the home to begin with,
- Property growth rates in the area,
- The amount of money borrowed,
- The interest rate charged,
- The age at which it was borrowed and how long someone lives.
Due to the compound nature of equity release, the longer a person remains in the home before it is sold, the more will be owed at the end and less returned to the estate.
In the case of older, cash-strapped retirees, taking out a PLS for a limited period can leave most of the equity in their home intact to pass on to their family.
If the true aim is to keep someone living in their own home for as long as possible and use the resources available to them to do this – like the equity in their home – then the PLS could assist other government policies targeting the same outcome.
The sums will be different for everyone, so we strongly advise you to get professional financial advice before acting.