Pension Loans Scheme - a good idea but cut the rate now


Remember the old saying, you can’t have your cake and eat it too? Well, there is a way to give retirees more income and stimulate the economy. Here’s how.

  • Spring 2020
  • Advocacy

It’s called the Pension Loans Scheme, or PLS. 

Most retirees don’t realise they can use the federal government PLS to draw on the equity in their home to provide a higher income in retirement.

Recent changes mean all eligible Australians of pension age who own property can use that equity to generate additional retirement income.

But here’s the catch: the current interest rate of 4.5 per cent is far too high.

That’s why National Seniors is fighting for a better interest rate as part of our Fairness in Retirement Income campaign.

Asset rich, but income poor? Read on...

At a time when economic stimulus is desperately needed, there should be an incentive for older Australians to unlock their property wealth and stimulate the economy.

The economy needs us

Most older Australians own their own home and want to stay there. The latest figures show more than three quarters own their home outright. But many are asset rich and income poor.

The PLS can be used to:

  • top up money from an existing pension, investments and employment to provide a more comfortable lifestyle in retirement
  • meet shortfalls during extraordinary events, such as a financial crisis
  • fund private health care costs and other health services (including home care), or
  • assist family members in financial hardship.

But there has been low take up of the scheme because the interest rate is not competitive, and the scheme was poorly promoted.

The interest rate was 5.25 per cent for many years. We said it was way too high then and it was dropped to 4.5 per cent in January this year. That was a big improvement but this latest rate is still well above commercial home loan rates and likely unattractive to most retirees.

With record low interest rates government can make the scheme much more attractive. Currently, the federal government can borrow at interest rates as low as 0.25 per cent. When you compare that to the current PLS rate of 4.5 per cent, it just doesn’t make sense. Labor Opposition’s Assistant Treasurer Stephen Jones has said the rate is “unconscionable”.

At a time when economic stimulus is desperately needed, there should be an incentive for older Australians to unlock their property wealth and stimulate the economy. If only 10 per cent of the almost four million Australians over the age of 65 withdrew just $5,000 to pay for health, aged care or other needs, this would inject $2 billion into the economy. That’s $2 billion for jobs and businesses across Australia, and for a better life for retirees.

A recent National Seniors poll showed an appetite to access the PLS may be substantial, with over one quarter of respondents stating they would consider using it and another 20 per cent unsure.

Drop the rate and promote it more and seniors would flock to take advantage. Improving the PLS is a simple way the federal government can use the current low interest rate environment to help millions of older Australians unlock equity in their home, fund a better retirement and stimulate the economy.

If you want to support this campaign please visit the National Seniors website and sign up to the Fairness in Retirement Income campaign.

Just imagine


If only 10 per cent of the almost four million Australians over the age of 65 withdrew just $5,000 to pay for health, aged care or other needs, this would inject $2 billion into the economy. That’s $2 billion for jobs and businesses across Australia, and for a better life for retirees.

How the PLS works


The government uses the equity in your home to pay retirees fortnightly. It recovers the loan and the interest charged from their estate.

Unlike reverse mortgages, the PLS cannot be taken as a lump sum. It is only paid fortnightly.

The maximum amount available is 150 per cent of the maximum pension rate. As of July 14, 2020, the maximum amount payable was $2,135.40 per fortnight for a couple (that’s more than $55,000pa) and $1,416.45 for a single (more than $38,000pa).

However, you can choose to withdraw a smaller amount, stop or start payments at any time, and pay back the loan at any time.

The government charges a compound interest of 4.5 per cent fortnightly on the loan.

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.

Pensioners Bob and Alison


Bob and Alison Mayer* are on a full Age Pension. Like 80 per cent of people in their mid-80s, they own their own home outright. It is an older home on a large block, recently valued at $780,000. Their combined Age Pension income is $1,423.60 per fortnight ($37,014 per year).

Alison has dementia and receives a Level 4 Home Care package with a dementia supplement. Bob provides Alison’s care needs together with the support of 11 hours per week from a home care provider.

Alison’s needs have increased significantly, and Bob is exhausted. The children have suggested it’s time he looked at residential care for Alison but Bob’s adamant he wants them to remain in their own home for as long as possible.

Using the PLS, Bob draws 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 (four hours per day compared to an average of around three hours in a residential care home).

Over five years, Bob and Alison would build up a loan of $94,765 (including compound interest of $10,664).

If the PLS rate was lower, the interest over five years would be less.

*Not their real names

Self-funded retirees John and Vera


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.

As well, they have long-term health conditions and private health insurance adds to their living costs. Their daughter 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 year) to cover their private health costs and help their daughter.

If they did this for five 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 per annum after five years, they’d have net equity in their home of approximately $966,000.]

If the PLS rate was lower, the interest over five years would be less.

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 improves.

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


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