What am I talking about?
Two weeks ago, the Government handed down the 2018 Budget. One of the more interesting initiatives was the expansion of the Pensions Loans Scheme (PLS) to take effect from the 1st of July 2019 – subject to legislation being passed.
Since the announcement of the expansion of PLS in the budget, several people who I have spoken to have mentioned that they were not aware that a PLS was currently available to age pensioners, who may not have qualified for the pension because of either their assets or income.
So I thought considering the budget announcement, I would take the opportunity to provide an overview of the current PLS and provide details of the expansion of the scheme as outlined in the budget.
The current PLS has been in operation since July 1996, replacing an earlier PLS which had operated since 1985.
The PLS operates in a similar manner to a reverse mortgage, except for one very important point. The loan amount is made on a fortnightly basis, building over time to the maximum loan available for that person. A lump sum option as is the normal practice under most reverse mortgage offerings is not available under this scheme.
The current PLS is an arrangement where a person, who is ineligible for the age pension under either the income or assets test, but not both, can apply for a loan. This loan is then paid on a fortnightly basis up to the amount of the maximum age pension. Age pensioners who are receiving only a part-rate payment may also apply to increase their payments under this scheme up to the level of the maximum age pension.
The outstanding debt is subject to a compound interest rate, currently 5.25% (it has been this rate since 1997), and the debt is secured by a statutory charge over the person’s real estate in Australia The debt would normally be paid back to the Commonwealth when real estate is sold, or from the person’s total estate after their death.
The maximum loan in total depends:
- on the value of the real estate asset which has been offered as security
- a person’s age and the relevant component amount
- and the nominated guaranteed amount.
Let me explain the last two points, starting with the final point – the nominated guaranteed amount is a dollar amount of equity a person would like to retain in their home.
The second point refers to a table setting out a person’s age and the corresponding component amount.
It may be easier to explain the total process with the following example:
An 82-year-old single male who owns a home valued at $550,000. He decides he needs to apply for an increase in the age pension to the full amount because of medical or home care costs. He would like to ensure that he retains 50% of the value of his home – $275,000. The maximum loan is calculated as follows;
Age component $4,930 X ($550,000 – retained value $275,000 divided by $10,000) = $135,575
The maximum loan, in this case, would be $135,575. The amount of the maximum loan is reviewed every year either in January or July depending on when a person’s birthday falls.
In this gentleman’s case, the loan slowly builds based on the fortnightly pension payment of $900 and the accruing compound interest of 5.25%, reaching the maximum loan amount of $135,575 in just over 4 and a half years.
As previously mentioned, the loan is repaid either on the sale of the home or from the person’s estate, so it is always important that any potential beneficiaries of a person’s estate are made aware of a loan and the possible effect on the proceeds of the estate.
The changes outlined in the budget to the PLS from the 1st of July 2019 will see the eligibility for the loan extended to all Australians of age pension age including self-funded retirees and full rate age pensioners.
The maximum fortnight payment under the PLS will be lifted to 150% of the full age pension, meaning that a full rate single age pensioner could increase their fortnightly payment by an additional $454 per fortnight or in the case of a full rate age pension couple increase their fortnightly payment via a loan of $684.10 per fortnight.
The Pensions Loans Scheme is not for everyone and in fact, there are currently very few pensioners in Australia receiving age pension under this arrangement, however for those people of age pension age, in the future, the PLS could be a lifesaver in helping to pay for medical and care costs.
If you are interested in looking at the PLS in more detail, please do make sure you do talk to someone who can explain the details of the loan and the effect it can have on the value of your home or estate.2