The Pension Loans Scheme is an under-utilised service that can form part of a client’s strategy for funding in retirement.
The Pension Loans Scheme (PLS) has been a chronically under-utilised service. A 2010 submission from Medicare identified that, despite almost one million Australians being eligible to use the PLS, only 710 loans existed. In the 2018 Federal Budget, the Government announced that it planned to increase the availability of the PLS from 1 July 2019. This change is now law and it means the PLS is available to 1.5 million more age pensioners, and establishes the PLS as a key strategy for retirees.
In a nutshell
At its heart, the PLS is a Government-run reverse mortgage facility. The pensioner uses their Australian property as security for a loan provided by the Federal Government. The loan is paid to the pensioner in the form of increased pension payments. Interest is charged on the loan at a rate set by the Government and the loan and interest is usually repaid when the property is sold or the pensioner dies, although it can be repaid earlier.
To qualify for the PLS, a client must:
Be of pension age or be the partner of someone who is of pension age;
Be receiving, or qualify for, age, disability support, wife or widow B pension, or the carer payment or bereavement allowance; and
Own Australian property of great enough value to secure the loan.
Tip: Before 1 July 2019, those who would qualify for a payment under one of the means tests (income or assets) but was ruled out by the other means test, met requirement two. Since 1 July 2019, those who are excluded by both the income and assets test can still qualify to use the PLS.
Rate of payment
The loan amounts under the PLS are paid as an income stream, effectively supplementing the recipient’s fortnightly social security payment. Currently, the PLS payments cannot take a recipient’s combined PLS and social security payments above 150 per cent of the maximum amount payable under their social security payment. This maximum amount payable includes any pension supplement, energy supplement and rent assistance for which the recipient is eligible.
Before 1 July 2019, the maximum rate of PLS payment was 100 per cent. As the maximum payment rate is now 150 per cent, the PLS is now available to full pensioners. This change was first proposed in response to the findings of a 2013 research paper from the Productivity Commission that, in part, examined why the PLS was not widely used.
Steve (age 70) is single and receives a part Age Pension of $300 per fortnight (including pension and supplements). He needs more income to fund his new hobby – playing golf – and decides to apply for the PLS using his principal residence as security.
The maximum PLS payment Steve can receive is $1,089.15 per fortnight (150 per cent of the maximum pension, or $1,389.15, less his fortnightly pension payment of $300)*. (* Figures based on pension rates up to September 20, 2019.)
Rate of interest
The current rate of interest charged on PLS loans has been set at 5.25 per cent per annum since December 25, 1997. Interest on the outstanding loan amount is added to the existing outstanding loan amount each pension payday.
Maximum loan amount
A recipient’s maximum loan amount depends on the value of the property offered as security (less any guaranteed amount) and the lesser of their age, or their partner’s age, using the following formula: The security value x Age component / 10,000.
When a recipient reaches their maximum loan amount, no further PLS payments can be received.
The age component is based on the lesser of the current ages of the recipient or their partner as outlined by Table 1.
Table 1: Age component
55 or below
90 and above
As the lender (i.e. the Government) will often not be repaid until the younger recipient dies or the house is sold, it needs to ensure there will be sufficient capital to repay the loan and all the accrued interests. Hence, the age component operates to only lend a percentage of the value of the security.
Only real Australian property may be used as security for the PLS. More than one property may be offered as security and it may include the pensioner’s principal home. Any property offered as security for the PLS must be valued. Any mortgage, life interest or third-party ownership over a property must be considered when valuing the property.
The PLS recipient can request a guaranteed amount. This is an amount of the property’s value that they, or their estate, will retain when the PLS loan is extinguished. The security amount for the purposes of determining the maximum loan amount is calculated as: the property’s value less the guaranteed amount (rounded down to the nearest $10,000).
The creation of a loan under the PLS creates a statutory charge over the properties used as security (a ‘notice of charge’ is used in Queensland). The client applying for the PLS must pay any costs associated with the creation, and removal, of the charge. These costs may be added to their loan amount.
Steve (age 70) uses his home as security for his loan under the PLS. Steve’s home is unencumbered and is valued at $707,000. Steve requests a guaranteed amount of $200,000 as he wishes to leave some value to his daughter, Arantxa. Steve’s maximum loan amount is calculated as:
The security value (rounded down to the nearest $10,000) x Age component / 10,000 = $500,000 x 3,080 / 10,000 = $154,000.
Reassessing the maximum loan amount
The maximum loan amount available under the PLS is not fixed. It is recalculated once every 12 months on either the January or July review date, immediately after the younger partner’s birthday.
Steve turns 71 and his maximum loan amount is reassessed. His home hasn’t changed in value, but his age component will be higher. His new maximum loan value is: $500,000 x 3200 / 10,000 = $160,000.
Income and assets test assessment
The income from the PLS is not assessed under the social security income test. The value of the assets used as security is reduced by the amount of the outstanding loan when assessed under the social security assets test.
If the PLS is secured by a non-assessable asset (such as the principal home), the reduction in value for the loan amount has no effect on the recipient’s social security payment amount. That said, where both assessable and non-assessable assets are used as security, the assessable assets value is reduced first.
Steve’s PLS income is not assessed as income under the income test used to determine his Age Pension entitlement. Steve is only using his principal residence as security, which is already exempt from asset test assessment. As such, the PLS arrangement will have no effect on his assets test result either.
Termination or suspension of PLS payments
There are certain circumstances that will result in a recipient’s PLS payments being stopped either temporarily or permanently. These include where the recipient:
reaches the maximum loan amount;
loses eligibility for their underlying social security payment; or
chooses to withdraw from the scheme.
Other events, such as separation, marriage and the sale of real estate, may result in a recipient’s PLS eligibility being reviewed.
Repayment of the PLS loan
Generally, the PLS loan is repaid either:
voluntarily at a time chosen by the recipient;
when the property securing the loan is sold; or
when the recipient dies.
It is possible to sell one secured property and replace it with another property to be used as security under the PLS. The replacement property will need to be of sufficient value to cover the outstanding loan.
If the primary recipient dies and is survived by a partner, the partner may continue to receive PLS payments if they qualify for the PLS in their own right. Similarly, if the surviving partner is of pension age and is using all or part of the secured assets (including as a principal home, holiday home or investment), the debt does not need to be repaid until after the surviving partner’s death.
If neither of the situations above apply, the PLS loan must be repaid after the surviving partner’s bereavement period has ended (commonly 14 weeks). The repayment will often be made by the deceased’s estate.
Additional notification requirements
On top of the reporting obligations under their normal social security payment, a PLS recipient must notify Centrelink within 14 days if:
there is a change in circumstances surrounding the property used as security;
they become a member of a couple; or
they separate from their partner.
Advice issues with the PLS
The core issue around providing advice on PLS loans is that they are considered a credit product, and thus are captured by the credit licensing laws in the National Consumer Credit Protection Act. The FPA received clarification on this issue from ASIC in June 2018.
Some planners operate under an Australian Credit Licence (ACL) and, as such, are able to directly recommend the PLS to clients. Most planners, however, do not have this luxury and must rely on exemptions to the rules on providing credit advice.
No ACL is required to provide ‘mere referrals’ to someone who can provide licensed credit advice. A mere referral involves either:
providing the details of a credit licensee to a client; or
providing the details of a client (with their consent) to a credit licensee.
There are a range of additional requirements in order for the action to be considered a mere referral. Included in these is that the client cannot be charged for the referral. Furthermore, the referrer cannot suggest to the client that the credit licensee can help set up a specific credit arrangement, such as a loan under the PLS.
As the PLS does not pay commissions to credit brokers, the best referral for a client likely to benefit from the PLS is to a fee-for-service financial planner operating under an ACL.
Ellen has been providing financial advice to her clients, Robyn and Peter, for 15 years. Robyn and Peter had been tracking well for retirement, however, just before their planned retirement date, the GFC hit.
Now, almost a decade into retirement, Robyn and Peter are coming close to exhausting their retirement income streams. As well as their home, they have a commercial property, which is currently occupied by their daughter’s new business and they don’t want to impose market rates of rent on her.
Ellen suspects Robyn and Peter may be able to use a reverse mortgage, most likely the PLS, to help fund their retirement. Ellen does not operate under a credit licence but does know another planner from her professional association chapter, Bruce, who does. Bruce provides advice on a fee-for-service basis.
Ellen provides Bruce’s contact details to Robyn and Peter and suggests they give him a call to get advice on funding their retirement using the equity in their properties.
Financial Information Service
One source of information on the PLS that clients can access is the Department of Human Services’ Financial Information Service (FIS). FIS officers, like the Department itself, are specifically exempted from the National Consumer Credit Protection Act rules and, as such, can provide information on the PLS, including how to apply for it.