Understanding The Pension Loans Scheme

By Jack Standing | More Articles by Jack Standing

The Pension Loans Scheme is a federal government initiative to help Australian retirees to supplement their income. Many Australian retirees have the bulk of their assets tied up in residential property. They are often said to be “asset rich but cash poor”.

Australian property prices have had a strong record of growth over the past three decades, and many Australian retirees have benefited from that growth by seeing the value of their residential homes rise considerably. However, being asset rich but cash poor during retirement can pose problems for retirees in terms of meeting their daily living expenses.

The Pension Loans Scheme enables retirees in Australia to ‘liquidate’ their assets by getting a voluntary, non-taxable, fortnightly government loan using their residential homes as security.1 These loan payments can supplement other retirement income they may have, such as the age pension and superannuation entitlements. The Pension Loans Scheme is essentially a government reverse mortgage scheme.

How much income do you need to retire in Australia?

The amount of income Australian retirees need depends on their age, whether they have a partner and the type of lifestyle they want to lead. According to the Association of Superannuation Funds of Australia (ASFA), Australian retirees aged 65 need the following income levels in 2020.2

Living arrangement Modest lifestyle Comfortable lifestyle
Single person $28,220 per year
($1,085.38 per fortnight)
$44,183 per year

($1,699.35 per fortnight)

Couple $40,719 per year
($1,566.12 per fortnight)
$62,435 per year
($2,401.35 per fortnight)

The potential shortfall

The full pension rates per year in Australia (listed below and including all available supplements)3 are currently below even the modest lifestyle amounts listed in the ASFA table.

Single Person Couple (each) Couple (combined)
$24,551.80 per year
($944.30 per fortnight))
$18,506.80 per year

($711.80 per fortnight)

$37,013.60 per year

($1423.60 per fortnight)

In addition, it’s important to understand that many Australians do not qualify for the full (or any) pension due to either their asset or income levels exceeding eligibility thresholds.45

Many Australian retirees also do not have sufficient (or any) superannuation savings due to the fact that the compulsory superannuation guarantee was only introduced in the early 1990s in Australia. This means that many Australian retirees did not have money being put away for their retirement by their employer for a significant portion of their working life. In addition, retirees who have spent their working lives in self-employment may not have any superannuation savings at all unless they have voluntarily contributed to a super fund. Further, many Australian retirees have had the value of their super negatively impacted by the the economic effects of the COVID-19 pandemic.

The Pension Loans Scheme is a potential solution to any income shortfall in retirement. Due to advances in medical technology, Australians are living longer and spending more time in retirement than ever before. The average life expectancy for Australian men is now 84 years and it is 87 for women.6 This is a substantial increase over previous generations and means that Australians generally need more money than ever before in retirement. In addition, Australia has an ageing population, with the percentage of people approaching retirement age increasing rapidly.7

Frequently Asked Questions

What are the eligibility requirements for the Pension Loans Scheme?

To be eligible for the Pension Loans Scheme, you (or your partner) need to meet five requirements:

• you are age-eligible for the age pension (currently 66 years of age – this will increase to 66 years and 6 months in July 2021 and 67 in July 2023)
• part or full pension eligibility (including the age pension, carer payment or disability support pension).
• ownership of Australian real estate that can be used as security for your loan (either your residential home or an investment property).
• appropriate insurance cover for your real estate security.
• you are not being bankrupt or subject to a personal insolvency agreement.

How does the Pension Loans Scheme work?

If you meet the eligibility requirements, you can apply for the Pension Loans Scheme through Centrelink via your myGov account.8 The amount you can borrow depends on your age and how much equity you have in your home. The maximum loan amount available generally increases as you get older. In addition, part-pensioners can usually borrow more than full-rate pensioners.

The funds you can borrow under the Pension Loans Scheme are not paid as a lump sum (unlike reverse mortgages that you can get through banks or other financial institutions). Instead, under the Pension Loans Scheme you receive a fortnightly payment of up to 1.5 times the maximum payment rate of the pension that you are eligible for. This payment includes both your eligible loan amount and your eligible pension amount. An interest rate of 4.5% is currently applied to your outstanding loan balance each fortnight. Prior to 1 January 2020, the Pension Loans Scheme interest rate was 5.25%.

Example: Single Full Rate Pensioner

Bill is 70, single, owns his own home and qualifies for the full age pension (which as mentioned earlier is currently $944.30 per fortnight). Under the Pension Loans Scheme, he would be eligible for up to 1.5 times his age pension (i.e. up to a total payment of $1,416.45 per fortnight, which includes his pension of $944.30 and a loan amount of $472.15).

Let’s assume Bill chooses to take the maximum amount available under the Pension Loans Scheme.

Bill would be charged 4.5% interest on the fortnightly $472.15 component of his payment. Bill would be eligible to increase his maximum payment amount of 1.5 times the maximum pension rate in line with any future increases to the pension rate.

Bill’s standard of living improves as a result of receiving extra income from his fortnightly Pension Loans Scheme payments.

Example: Part-Pension Couple

Henry and Jane are married age pensioners who own their own home. Although as mentioned earlier the maximum combined fortnightly pension that they can currently receive is $1,423.60, they only receive a part pension of $1,000 per fortnight due to the amount of super income that they also receive. This income affects their pension entitlement under the age pension income test.

However, the fact that Henry and Jane are part-pensioners increases their maximum fortnightly payment entitlements under the Pension Loans Scheme. They are entitled to receive a pension loan payment of up to 1.5 times the maximum couple pensions rate LESS the part-pension amount that they currently receive. The calculation is as follows:

Maximum couples combined pension rate: $1,423.60 per fortnight.

Maximum combined full pension fortnightly payments under the Pension Loans Scheme: $1,423.60 x 1.5 = $2,135.40 per fortnight.

Combined part-pension that Henry and Jane currently receive = $1,000 per fortnight.

Maximum fortnightly combined pension loan payment available to Henry and Jane = $1,135.40 per fortnight (i.e. $2,135.40 less $1,000).

Henry and Jane would be charged 4.5% interest on the pension loan payment amount that they choose to receive. Let’s assume they decide to take the maximum amount available. This amount would also increase in line with any future increases to the pension rate.

Henry and Jane’s standard of living improves as a result of receiving their fortnightly Pension Loans Scheme payments.

What is the Maximum Loan Amount?9

It is the maximum amount that can be borrowed (drawn) against your home. The calculation is as follows:

Your home value divided by 10,000 multiplied by the Age Component Amount10.

So, for example:

$900,000 home / 10,000 = 90
90 X $2,530 = $227,700 (65 yo)
90 X $3,750 = $337,500 (75 yo)

How does a pension loan get repaid?

If you sell your property, you are required to repay your outstanding pension loan balance. If you owe money on your pension loan when you die, it will be repaid out of the proceeds of your estate (unless you have a partner who continues living in the home, in which case the pension loan will continue until your partner’s death, when it will need to be fully repaid).

Example: Single Full Rate Pensioner

Let’s assume Bill (our single pensioner in the earlier example) lives to the age of 80 before passing away and that during the 10 years he is part of the Pension Loans Scheme, his total amount owing (including interest) grows to $170,000. Let’s also assume that the value of his home increases from $500,000 to $750,000 over that same period. Upon Bill’s death, $170,000 would be deducted from his estate to fully repay his pension loan, and the balance of his house sale proceeds ($580,000) would be available to distribute to his nominated beneficiaries.

Example: Part-Pension Couple

Let’s assume that Henry and Jane (our couple in the earlier example) decide to sell their home after 7 years to move into a retirement village. During that time, their total amount owing under the Pension Loans Scheme (including interest) grows to $275,000. The value of their home also increases from $500,000 to $680,000 over the same period. (Note that in this example the increase in value in Henry and Jane’s home is less than the amount of Pension Loans Scheme debt they have accumulated, so the net value of their assets have actually decreased – this isn’t always the case but it can happen. It depends on a range of factors including property market conditions and the duration of the loan).

When Henry and Jane sell their home, they are legally required to repay the $275,000 owing under the Pension Loans Scheme from their sales proceeds ($680,000). They can keep the balance (i.e. $405,000) to use as they wish (e.g. for their retirement village accommodation).

How long has the Pension Loans Scheme been available?

The Pension Loans Scheme has been available since 1985 when it was introduced by the Hawke Labor government. However, eligibility for the Scheme was restricted to part-pensioners until 1 July 2019 when the Turnbull Coalition government broadened the eligibility requirements to include full age pensioners and self-funded retirees.

In addition, the Turnbull government increased the amount available for fortnightly payments under the Pension Loans Scheme from 100% of the pension rate to 150%.

Can you get a loan under the Pension Loans Scheme if you still have a mortgage on your home?

Potentially, yes. However, most commercial home loan contracts prohibit you from using your property as security for any other loan. If you don’t have this restriction, it’s important to understand that the amount of equity you have in your home will be reduced by the amount you owe on the property. This in turn will reduce the amount you can borrow under the Pension Loans Scheme.

Can you end up owing more than your home is worth under the Pension Loans Scheme?

There are a number of measures in place to help ensure that this doesn’t happen, including:

• age-based borrowing limits (for couples, the age of the younger spouse is the consideration), and
• the value of your home.
• You can also specify that you want to retain a minimum level of equity when you apply for a loan under the Pension Loans Scheme (for example, if you want to retain a minimum value to pass on to your dependants after you die).

Can you make partial repayments under the Pension Loans Scheme?

Yes, you can make partial repayments at any time. However, you don’t have to make any repayments at all.

Are Pension Loans Scheme payments counted as income for the age pension income test?

No, any payments you receive under the Pension Loans Scheme are not counted as income for the purposes of the age pension income test.

Are there any ongoing Pension Loans Scheme fees?

Other than interest, there are no ongoing Pension Loans Scheme fees. On the other hand, there are usually ongoing fees associated with reverse mortgage loans offered by commercial lenders.

The bottom line

The Pension Loans Scheme is an option to consider if you own (or have a significant amount of equity in) your home and you need more income in retirement. However, it’s important to seek advice to determine whether it’s an appropriate option for your individual circumstances.

1. https://www.servicesaustralia.gov.au/individuals/services/centrelink/pension-loans-scheme
2. https://www.superannuation.asn.au/resources/retirement-standard
3. https://www.servicesaustralia.gov.au/individuals/services/centrelink/age-pension/how-much-you-can-get#a1
4. https://www.servicesaustralia.gov.au/individuals/services/centrelink/age-pension/how-much-you-can-get/assets-test
5. https://www.servicesaustralia.gov.au/individuals/topics/income-test-pensions/30406
6. https://www.aihw.gov.au/reports/life-expectancy-death/deaths-in-australia/contents/life-expectancy
8. https://www.servicesaustralia.gov.au/individuals/services/centrelink/pension-loans-scheme/how-apply
9. https://www.servicesaustralia.gov.au/individuals/services/centrelink/pension-loans-scheme/how-much-you-can-get/maximum-loan-amount
10. https://www.servicesaustralia.gov.au/individuals/services/centrelink/pension-loans-scheme/how-much-you-can-get/maximum-loan-amount/age-component-amount

About Jack Standing

Jack Standing is the National Head of the Advice Team for Spring FG Wealth. His primary responsibilities cover advice and strategy development, adviser training and education as well as being a ‘responsible manager’ of the group’s AFSL.

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