Managing your finances in retirement can be tricky if you don’t have an extra income from superannuation or investments to support you. However, there are ways that you can supplement your income through Centrelink.
One way to your income a bit of a boost is via the Pension Loans Scheme, which is a tax-free loan only available to part-Age Pensioners.
Here’s everything you need to know about the scheme, from checking your eligibility and applying, to repaying the loan.
The Pension Loans Scheme is actually a reverse-equity mortgage. In short, the government accepts some of the equity in your home as security against a loan, with the loan monies to be used by you as an income supplement.
It’s a non-taxable loan that can be used to provide financial help over short period or indefinitely (depending on the rate at which you decide to have the money paid out) but the loan monies can’t be accessed as a lump sum and the amount, set by you, up to the maximum rate of pension, must be paid to you fortnightly.
The first thing to be aware of is that you can’t access the scheme if you’re already eligible for the maximum rate of pension payment.
Nor are you eligible for the scheme if both your income and your assets cause you to receive only a part-pension. You can apply, however, if just one of the two tests – income or assets – qualifies you for a part-pension or disqualifies you from receiving pension payment at all.
You or your partner must be of pension age and meet Age Pension residence rules. It’s also essential that you own real estate in Australia, as this property will be used as security for the loan. This property can either be the home you live in or an investment property.
The total amount you can receive from the loans scheme depends on a number of factors, including the equity you have in the property you’re putting up as security, the amount of equity you want to keep in your property and the age of yourself or your partner.
The amount you will be paid each fortnight can be no higher than the maximum rate of the pension payment that you would otherwise be eligible to receive. This means that if you already receive a part-pension, your loan could be used to top up that payment until it is equal to a full Age Pension.
There can be costs associated with setting up a loan under the Pension Loans Scheme, such as legal fees.
If approved, you’ll be sent a letter from Centrelink outlining the costs you are required to pay. It’s up to you whether you choose to pay these costs immediately or, if it better suits your circumstances, add them to your outstanding loan balance. However, it is important to be aware that should you choose to add them to your loan, they will be subject to interest charges.
You should also be aware of interest rates before you access the scheme. According to the Department of Human Services’ website, the current rate of compound interest you will be charged on your outstanding loan balance is 5.25 per cent.
Interest fees will be added to your outstanding balance every fortnight until the loan has been repaid fully so the longer it takes you to repay the loan, the more interest you will incur.
It’s important to remember that once your home has been used to secure a loan, it may reduce your financial flexibility in that you may not be eligible for other loans that also use your home as security.
Should you wish, you can repay the loan in part or full at any time.
This changes, though, if you want to sell the property that you put up as collateral. If you decide to sell you must notify Centrelink immediately. You can then choose to transfer the loan to another property or, if you do not own another property, you can repay the loan on the date of your property sale settlement.
If there is an amount of the loan outstanding after your death, it must be repaid by your estate. In some cases, your surviving partner may be able to have to loan transferred to them, and their estate would then be required to repay the loan.
Important information: The information provided on this website is of a general nature and for information purposes only. It does not take into account your objectives, financial situation or needs. It is not financial product advice and must not be relied upon as such. Before making any financial decision you should determine whether the information is appropriate in terms of your particular circumstances and seek advice from an independent licensed financial services professional.