One of the more intriguing announcements of Scott Morrison’s 2018 budget was the expansion of the Pension Loans Scheme. This scheme has been around for many years but has remained relatively dormant, with as few as 700 retirees taking advantage of it to date. The proposed expansion of the scheme, however, will make it an option that deserves more serious consideration as a way for retirees to supplement their income.
So, what is this scheme actually about and how will the budget changes make it more attractive?
How the scheme works
The basic principle of the Pension Loans Scheme is to give retirees a way to use the equity they have in their property assets to generate some supplementary income in the form of a loan from the government. Collateral for the loan can either be the person’s home or an investment property.
The scheme generally works in a similar way to a reverse mortgage, but rather than paying you a lump sum, the loan is made in the form of a fortnightly income stream as part of your pension payment.
Just like any other loan, there is an interest rate charged but this is currently set at 5.25 per cent, which is quite reasonable compared with commercial reverse mortgage rates. While the loan must ultimately be repaid, you have flexibility to pay it back in part or full at any time — there is no set repayment schedule.
If you die while the loan is outstanding, repayment will be claimed from your estate, or in some cases, your surviving partner’s estate can make repayments.
Converting equity to income
While the scheme to date has been largely ignored, it does have a lot of merit as a simple way of translating assets to income. This can be particularly attractive to those who are “asset rich and income poor”.
Rather than leaving all their money tied up in their property until it is passed on to their beneficiaries after death, the scheme allows retirees to access that equity without all the trauma of selling the home. The fact that it is the government loaning you money takes some of the worry out of the process, and the fact that the loan is paid to you in small fortnightly instalments means that you are not committing to a large loan all at once.
How will the budget changes make it more attractive?
The changes in the budget effectively open the scheme up to a wider range of retirees and will increase the maximum amount that can be loaned as a fortnightly income stream.
Prior to the changes, the scheme was limited only to those who were receiving a reduced amount of Age Pension, due to the effects of the income or assets test. The amount that could be borrowed was also limited to the difference between your part pension and the maximum pension rate, so that the total you received would not exceed the full pension rate.
The changes will now increase the maximum payment to 150 per cent of the age pension, less any amount you were already receiving as a pension.
Eligibility has also been opened up to a much wider audience — self-funded retirees as well as those who are already on the full rate of pension can now take advantage of this scheme.
When do the changes take effect?
These changes are one of the more positive aspects of the budget for retirees, with the potential to transform a little-recognised and under-utilised scheme into a genuinely practical alternative for supplementing retirement income.
The changes still need to make their way through the senate, as part of the normal budget process. If they are approved, they will come into effect in July 2019.
How do you feel about the idea of cashing in some of your home equity, rather than leaving it all to the kids? Tell us in the comments below.
- 2018 Federal Budget Overview
- 2018 Budget – Aged and Home Care
- 2018 Budget – Pension Loan Scheme
- 2018 Budget – Health Care