It can be tough to manage your money in retirement, particularly if you don’t have access to extra income from superannuation or investments to support you, leaving many older Aussies looking for other ways to boost their finances.
One way that retirees can access additional income is to make use of the government’s Pension Loans Scheme, which is a tax-free loan currently available to part-Age Pensioners. However, the Department of Human Services recently announced that the scheme is set to undergo some changes later this year.
The Pension Loans Scheme (PLS) 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 a 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.
Currently, to access the PLS you must qualify for an eligible pension payment which includes; Age Pension, Bereavement Allowance, Carer Payment, Disability Support Pension, Widow B Pension and Wife Pension.
Under current guidelines you must also have a payment rate above $0 for either the income or assets test. This means that those who currently only receive a part-pension due to both their income test and assets test are not eligible to apply for the Pension Loans Scheme.
However, from July 1, this rule no longer applies, as long as you still meet the eligibility requirements for a pension.
Another major change is that, as of July 1, those in receipt of the maximum rate of pension will also be able to access the scheme.
The amount you can get per fortnight is also set to increase, rising from 100 per cent to 150 per cent of the maximum fortnightly pension rate. This means you can now get up to 1.5 times the maximum rate of pension each fortnight.
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 the loan transferred to them, and their estate would then be required to repay the loan.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial situation, objectives or needs. That means it’s not financial product advice and shouldn’t be relied upon as if it is. Before making a financial decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services advice.