The Pension Loan Scheme (PLS) was enhanced in the budget last week. Many of our readers have asked that we tell them a bit more about how this works. So what is it?
The Pension Loan Scheme allows people to top up to an amount of up to 150 per cent – or 1.5 times – the maximum fortnightly rate of Age Pension (i.e a loan from the government using the capital locked up in their home or other property assets). Subject to a few conditions the scheme is available to those on the age pension as well as self-funded retirees who are of age pension age.
How does it work?
Essentially the Government is lending you money. The loan is secured against your property. This could be your home, holiday home or an investment property. The current interest rate is 4.5% and the debt, including the compounded interest, doesn’t need to be repaid until the property is sold or the borrower dies.
One of the fears that people used to have about arrangements like these was that borrowers could end up owing the lender money. A great feature of the PLS is that the debt is capped and can never exceed the value of the property.
The money that is borrowed can be paid to you in two ways. The most typical is as a fortnightly payment. The other way is as a lump sum. The change announced in the budget is that from 1 July 2022, eligible people will be able to access up to two lump sum advances in any 12-month period. These lump sums could be up to a total value of 50% of the maximum annual rate of Age Pension (currently $12,385 for singles and $18,670 for couples).
How much can you borrow?
In total the PLS allows you to receive up to 150% of the full age pension comprising any age pension entitlements plus the borrowed amount e.g.
- Someone on a full age pension can borrow a further 50% of the value of the age pension. A single person on an age pension of $24,770 p/a could borrow a further $12,385 giving them a total of $37,155 while a couple on $37,340 p/a could get an additional $18,670 giving them a total of $56,010 p/a.
- A self-funded retiree not receiving any age pension could borrow right up to the 150% limit and again could get $37,155 p/a for a single and $56,010 for a couple.
The PLS is a great way to get access to the equity in your home and improve your retirement income but its not for everyone and there are some important things to consider:
- The debt compounds so it is likely the equity in your home will reduce over time. When, or if, you sell your property there will be less leftover for other things such as age care accommodation or for your estate
- The interest rate at 4.5% is relatively high right now. Retirees often find it difficult to borrow money from traditional lenders but there could be lower-cost options to consider
It is always good to get advice on major financial decisions and we would recommend doing so before seeking a loan under the PLS.