Most retirees do not know they can use a government scheme to draw on the equity in their own home to provide a better income in retirement.
It’s called the Pension Loans Scheme, or PLS.
As of 1 July 2019, changes to eligibility for the PLS mean that all eligible Australians of pension age who own property can now use the equity in their property to generate additional retirement income.
But the current interest rate of 4.5 per cent is too high.
Most people own their own home and want to stay in their own home as they age but many don’t have access to additional income – they are asset rich and cash poor.
The PLS provides a relatively safe way to generate additional income using home equity.
It could be used to:
- top up existing income from the pension, investments and employment to provide a more comfortable lifestyle in retirement
- meet income shortfalls during extraordinary events, such as a financial crisis
- fund health care services including ongoing home or residential care services, or
- assist family members in financial hardship.
Historically, there has been low take up of the scheme because the interest rate was not competitive and the scheme was poorly promoted.
The interest rate was as high as 5.25 per cent for many years before being dropped to 4.5 per cent from January 2020. Yet this rate is still well above commercial interest rates and likely unattractive to retirees.
National Seniors believes the take-up of this scheme would increase if the interest rate was lowered to better reflect current interest rates and was more widely promoted.
Under the scheme, the government uses the equity in a person’s home to pay them this fortnightly payment. The government recovers the loan and interest from their estate.
Unlike reverse mortgages, the PLS cannot be taken as a lump sum. It is only paid on a fortnightly basis.
The maximum amount available via the PLS is 150 per cent of the maximum pension rate. As at 14 July 2020, the maximum amount payable was $2,135.40 per fortnight for a couple and $1,416.45 for a single. However, a retiree can choose to withdraw a smaller amount, can stop or start payments at any time, and can pay back the loan at any time.
The government charges a compound interest of 4.5 per cent on the loan amount.
Importantly, PLS payments do not count towards the pension income test or affect the aged care means test. Amounts received from a PLS loan are also non-taxable.
Bob and Alison Mayer* are 87 and 84 respectively. They are on a full Age Pension. They own their own home outright. It’s an older home on a large block and has been recently valued at $780,000. Their combined Age Pension income is currently $1,423.60 per fortnight ($37,014 per year).
Alison has dementia and receives a Level four package with a dementia supplement. Bob provides Alison’s care needs together with the support of 11 hours per week from a provider.
Alison’s care needs have increased significantly, and Bob is both exhausted and stressed. The children have suggested it is now time he looked at residential care for Alison. Bob is adamant he wants them to remain at home for as long as possible.
Bob decides to draw down $16,000 per annum ($615.38 per fortnight) to cover the additional costs of private care by topping up their government funded care package.
The arrangement also provides more personal care hours than in an aged care home (4 hours per day compared to an average of less than 3 in a residential care home).
Over 5 years, Bob and Alison would build up a loan of $94,765 (including compound interest of $10,664).
If the PLS rate went down to 3.25 per cent, the interest over 5 years would only be $7,717.
John and Vera Hunt* are 75 and 69 respectively. They are self-funded retirees who own their own home outright. The home has been recently valued at $900,000. Their regular income from their investments is $2,820 per fortnight ($73,320 per year), however the recent hit to the share market means their income is greatly diminished, at least in the short term.
On top of this they both have long-term health conditions and private health insurance which add to their living costs. They also have a daughter who has recently lost her job and is struggling with mortgage repayments. John and Vera want to meet their health care costs, help their daughter and still have a quality retirement.
They decide to draw down $500.00 per fortnight ($13,000 per annum) to cover some of their private health costs and give their daughter help with her mortgage.
If they did this for 5 years, John and Vera would build up a loan of approximately $77,000 (including compound interest of $8,800). [If their home grew in value at 3 per cent p.a. after 5 years, they'd have net equity in their home of approximately $966,000].
If the PLS rate went down to 3.25 per cent the interest payable over 5 years would only be $6,400.
If their investment income went up, they might want to reduce their PLS payment. They could also choose to stop the payment altogether if their situation changes.
Conversely, if they needed more income, they could increase their payment up to the maximum amount of 150 per cent of the pension.
This would ultimately affect the final amount they would owe in the future. They would need to think about this carefully and factor in the additional interest charged over the life of the loan until the estate was settled.
*Not their real names.
Improving the PLS is a simple way that government can use the current low interest rate environment to help older Australians unlock equity in their home and fund a better retirement.
Sign up to the Fairness in Retirement Income campaign or show your support by becoming a National Seniors member.