The Australian government offers a Pension Loans Scheme (PLS) to retirees who wish to access the equity in their home so that they can top up their retirement income.
The scheme was first introduced in 1985 and expanded in 2019 to widen eligibility, and include self-funded retirees. The maximum loan amount is calculated according to:
- Your age
- Your partner’s age (if applicable)
- The value of your home
- The amount of equity in your home that you may wish to exclude
- The term of the loan.
You can repay the loan or it will be resolved by the sale of the property upon your death.
Two weeks ago a Bill related to the PLS was introduced to the House of Representatives.
How might the changes affect you?
Firstly, by a more flexible drawdown process. From July 1, 2022, retirees will be able to access capped advance payments. This means that, instead of having access to the equity in their homes in fortnightly payments (singles maximum $1451, couples maximum $2188), the loan can be drawn down twice a year, for a total of $12,580 for singles and $18,960 for couples.
The second major change to the PLS is that it will have a ‘No Negative Loan Guarantee’. This means that no PLS participant can ever owe more than the value of their secured property. Whilst this new ‘No Negative Guarantee’ addresses a concern of many older Australians who have considered participation in the scheme, it does not address another aspect of the loan.
This is the interest rate, currently 4.5%.
Many organisations which represent the interests of older Australians have noted how high this rate is compared to the current Reserve Bank official rate of 0.1% and market rates of approximately 2.5%.
The higher rate attached to the PLS seems to be a barrier to uptake of this scheme, even though this interest is unlikely to be repaid during the lifetime of the participant unless they sell their home.
However this also means that a higher interest rate of 4.5% will further reduce the value of your home as an asset if you need to sell to go into an aged care facility.
What do you think?
Would you consider accessing the PLS for a retirement income top-up?
Does the new guarantee encourage you to participate?
Or is the interest rate a negative factor?
As you can see the rules and calculations on the PLS are complex. You can find out more about the PLS here.