- Background to the PLS
- 10 facts you need to know about the PLS
- New PLS rules from 1 July 2019
- For more information…
Retirees are always looking for new ways to boost their retirement income or to pay for expenses, like home care. Although downsizing to a small home can be one option, the Pension Loans Scheme (PLS) offered by the federal government is a rarely considered alternative.
Although the PLS has been around for about 30 years, few retirees know about it and even fewer have used it due to some fairly restrictive eligibility rules. But from 1 July 2019 all that is changing, with the federal government expanding the eligibility criteria and withdrawal amount to make the PLS more attractive (subject to legislation).
Under the new rules, many more people of pension age will be able to apply to use this ‘reverse mortgage’ scheme to access an income stream, by borrowing against the equity they have built up in their home.
Note: A reverse mortgage is a form of home loan that allows you to borrow money against the equity (or value of your home less any mortgage debt) you have in your home. Borrowers are required to pay interest on the loan, but regular repayments are not required and instead, are added to the loan amount. You can remain in your home until it is sold, usually on your death. For more information about reverse mortgages, see SuperGuide article Reverse mortgages: retirement income solution or snare?
Background to the PLS
The PLS was first established in 1985 when the Hawke Government re-introduced an assets test for the Age Pension, and other pensions. Take-up of the scheme has always been limited, despite the Keating Government broadening eligibility in 1996.
According to a Productivity Commission report in 2010, there were only 710 loans in place at that time.
In the May 2018 Federal Budget, the Turnbull Government decided to significantly broaden eligibility for the PLS by allowing FULL Age Pensioners and self-funded retirees to participate in the scheme. From 1 July 2019, the PLS will be available to all retirees of Age Pension age (subject to legislation).
Important: The changes to the Pension Loans Scheme were announced as part of the 2018/2019 Federal Budget (May 2018 Federal Budget), but the new rules and expanded eligibility will not come into effect until 1 July 2019. (For more information about other retirement income-related budget announcements, see SuperGuide article 2018 Federal Budget summary: Superannuation and retirement measures.)
10 facts you need to know about the PLS
Set out below are 10 important facts you need to know about the Pension Loans Scheme (PLS):
1. Eligibility is restricted
Currently, to apply for the PLS, the borrower or their partner must be of Age Pension age and meet the Age Pension residence rules. An individual is eligible for the PLS if:
- they receive a reduced rate of Age Pension, or
- if they fail one of the Age Pension means tests (assets or income), which means they cannot receive any Age Pension.
Note: If an individual fails both Age Pension income test and assets test, then they are not eligible for the PLS.be eligible for a government pension, such as the Age Pension.
If you receive less than the maximum rate for the Age Pension, bereavement allowance, carer paymentdisability support pension, widow B pension or wife pension you can apply for a PLS loan. This means PLS loans are generally only available to PART Age Pensioners, and some self-funded retirees (that is, where the individual meets one of the Age Pension means tests)
The PLS is currently not available to those receiving the maximum rate of any of these pensions or allowances, including the FULL Age Pension.
2. Loan amounts are limited
Currently, the PLS only allows retirees to borrow an amount to top up their PART Age Pension to the equivalent rate of the fortnightly FULL Age Pension. PLS borrowers who are not eligible for any Age Pension (due to not meeting one of the means tests) can also receive payments equivalent to the FULL Age Pension rate. If an individual fails to meet both the Age Pension income test and assets test, then they are not eligible for the PLS.
The amounts received from a PLS loan are non-taxable.
3. Regular payments, no lump sums
Income from a PLS loan is received as fortnightly payments and you can choose the amount of the fortnightly loan, up to the maximum rate of a FULL Age Pension.
Unlike normal, commercial reverse mortgages, lump sums are not available under the PLS (for information about reverse mortgages, see SuperGuide article Reverse mortgages: Retirement income solution or snare?).
4. Loans are from the government
The PLS is administered by the Department of Human Services and eligible retirees receive the loan payments from the federal government.
Under the scheme, eligible retirees can borrow up to the maximum rate of income support of the income support payment they qualify for, such as the FULL Age Pension.
5. Age-based limits apply
The amount that can be borrowed by a retiree is limited by your age, so you do not end up owing more than your home is worth.
The total loan amount available depends on your equity in your property, any equity you wish to keep in your property and the age of you or your partner, whoever is younger.
6. Real estate is required
To qualify for the PLS, the borrower must have equity in real estate that you can use as security for the loan. The property can be either the borrower’s own home or an investment property, and it must be located in Australia.
7. Set interest rate
There is a fixed interest rate for PLS loans of 5.25% p.a. compound interest on the outstanding loan balance. The interest rate has remained the same since December 1997.
Interest is added to the outstanding loan balance fortnightly until the loan is fully repaid, which normally occurs when the home is sold or paid from the borrower’s estate.
8. Repayments can be made
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
PLS payments are not counted towards the Age Pension income test.
PLS payments are not counted for Age Pension purposes. In comparison, normal reverse mortgages may affect the amount of Age Pension you receive if you choose to accumulate the payment/s you receive over a period of time (for information about reverse mortgages, see SuperGuide article Reverse mortgages: Retirement income solution or snare?.
10. No fees
There is no establishment fees or monthly account fees with the PLS, which compares with around $1,000 for an establishment fee for a normal home loan mortgage. Centrelink may, however, charge costs (including legal fees). These Centrelink costs are determined after the loan application is made and can be paid immediately, or added to the outstanding loan balance.
Setting up a PLS loan will require valuation of the property by a licensed valuer, but there will be no cost to applicants for this valuation.
New PLS rules from 1 July 2019
Although most of the rules for the PLS will remain the same under the expanded scheme, the key difference will be changes to the eligibility rules, with all Australians who reach Age Pension age able to access loans from that date.
Under the expanded Pension Loans Scheme from 1 July 2019:
- FULL Age Pensioners will be able to borrow up to 50% of the maximum rate of the fortnightly Age Pension (including supplements).
- PART Age Pensioners will be able to withdraw a fortnightly payment up to a maximum of 150% of the FULL Age Pension.
- Self-funded retirees will be able to borrow up to 150% of the fortnightly FULL Age Pension.
PLS borrowers will be able to choose any payment amount up to the 150% threshold amount.
If you are interested in the PLS, it’s probably worth taking a look at the Department of Human Services online information about the scheme. Check out the current rules here.
For more information…
For more information about how much is enough for retirement, and how to secure that income in retirement, see the following SuperGuide articles:
- How to plan for your retirement
- How much super do you need to retire comfortably?
- Retirement income: Living on more than $60,000 a year
- Understanding your life expectancy
- How Much Super Is Enough Reckoner
- Retirement Income Reckoner
- What is the retirement age in Australia?
- The super challenge: At what age should I retire?
- Retirement Age Reckoner: Discover your preservation age and Age Pension age
- Accessing super: What is my preservation age?
- Age Pension age increasing to 67 years (not 70 years)
- Australian Age Pension: 10 important facts you should know
- Australian Age Pension: Am I eligible and how do I apply?
- Contributing super by downsizing your home: 10-point guide
- Reverse mortgages: Retirement income solution or snare?
- Free retirement planning assistance now available