What is the Pension Loans Scheme and how could it help boost retirees' income?

Pensioners and self-funded retirees who own property outright may be able to receive an income boost under the Pension Loans Scheme.

The 2021 Federal Budget proposed changes to improve the uptake of the Pension Loans Scheme, including allowing participants to receive lump sum payments. But what is the scheme and how does it work?

What is the Pension Loans Scheme?

The Pension Loans Scheme (PLS) is a program designed to help asset-rich, cash-poor pensioners and self-funded retirees receive extra income. Given there are a number of older Australians who own their own homes but do not necessarily have high incomes or large reserves of cash on hand, the Federal Government offers the PLS to help older Australians get a non-taxable supplement to their retirement income via a loan secured against their home or other real estate such as a holiday house.

If you receive or are eligible to receive an Age Pension, Carer Payment or Disability Support Pension, you can apply to take out a loan under the PLS, using your home or other property as security. The loan is currently paid fortnightly as a supplement to the pension. However, the government has now proposed allowing up to two lump sum payments per year.

The income boost has been described by the government as a type of reverse mortgage – whereby you can use equity accumulated in a residential property – from the government.

The government charges an annual interest rate – currently 4.5% – that compounds each fortnight on the outstanding loan balance. You can repay the loan in part or full at any time, the government says on its Services Australia website. If you sell the property used as security, you can either transfer the loan to another property (including your new home) or repay the loan at settlement. Generally, the loan must be paid back within a set timeframe if you die.

How much can I borrow?

Eligible pensioners can receive a maximum of 150% of the fortnightly Age Pension rate (including the pension amount and loan). This means full pensioners can potentially receive the full Age Pension amount, plus borrow an additional 50% of the Age Pension. That works out to borrowing around $12,385 a year for singles and $18,670 for couples, according to the current Age Pension rates.

What is changing?

The PLS has been given a boost as part of the 2021 Federal Budget. The government will inject $21.2 million into the scheme over the next four years from 2021-22 to help improve its uptake.

This includes allowing participants to access up to two lump sum payments in any 12-month period, up to a total of 50% of the maximum annual Age Pension rate, from 1 July 2022.

The government will also introduce a ‘No Negative Equity Guarantee’ from 1 July 2022, so borrowers will not have to repay more than the value of their property. This will bring PLS loans in line with private-sector reverse mortgages, the government said.

Who is eligible and how do I access the scheme?

To be eligible for the scheme, the government says you need to meet the following criteria:

• you or your partner must be of the Age Pension age
• you must receive or be eligible to receive a qualifying pension
• you or your partner must own Australian real estate that can be used as security for the loan
• you must have adequate and appropriate insurance covering the real estate
• you must not be bankrupt or subject to a personal insolvency agreement.

Payments that qualify include:

• Age Pension
• Carer Payment
• Disability Support Pension

If you meet these conditions, you may be able to use your property as security for a PLS loan. If your application is approved, then each fortnight you may be paid a fixed amount or a percentage of your maximum pension rate. This may continue for as long or as short a period as you like. Under the new rules, you will also be allowed to receive up to two lump sum payments per year, totalling up to 50% of the highest annual Age Pension rate. The exact amount you can receive will depend on your age and the equity you own in your property. You can read more about the PLS and submit an application for the Scheme on the Services Australia website.

While you can make a repayment at any time, you generally don’t need to until you sell the property being used as security, or until your death, after which time the full loan amount and interest owed would be recovered from your estate. Keep in mind that the longer you take to repay the loan, the more interest you or your relatives will likely need to pay.

Potential risks to consider

If you are retired and own your home but are still struggling to make ends meet, then the Pension Loans Scheme might be worth considering as a supplement to your income. But it’s worthwhile weighing up the potential downsides before applying, such as:

• The value of the home you use as security for the loan may be reduced, because any amount owing on the loan may be deducted from the sale price.
• An outstanding loan when you die may reduce any inheritance you had intended to pass onto your children or other loved ones.
• Compounding interest adds up. For instance, the Services Australia website shows a fortnightly loan amount of just $50 ($1,300 per year) would compound to $7,294.89 over five years and $16,428.67 over 10 years, including principal and interest amounts (assuming the fortnightly loan amount, interest rate of 4.5% and property values remained the same).

You can find out more about the scheme on the Services Australia website.

Additional reporting by Tamika Seeto and Tim Smith.

Cover image source: Suntezza/Shutterstock.com