New-look pension loans scheme poised for take off
Money is tight for pensioner Glenda Maybury. The 65-year-old has no super saved and supplements her age pension with part-time work, driving special-needs children to and from school.
The new scheme gives pensioners more options.Credit:Shutterstock
Glenda recently learned about the federal government’s revised Pension Loan Scheme and hopes this reverse-mortgage-type loan could help them further turn things around.
“I’ll definitely be looking into it,” she says.
“My husband will be retiring in the next couple of years and, with limited super, it’s going to be a bit dire otherwise.”
The new-look Pension Loan Scheme offers older Australians an income to supplement their aged pension in retirement.
It allows people like Glenda to receive capped fortnightly payments until their loan limit is reached, at a discounted rate of interest.
The scheme, which came into effect on July 1, will be available to well over a million Australians.
While the funds from the government cannot be taken as a lump sum, it’s a viable alternative for retirees who are asset-rich but cash poor.
Those who meet the criteria can apply to receive an income stream of up to 150 cent of the full rate Age Pension, placing someone between the "modest" and "comfortable" standard of living by national retirement standard estimates.
For example, a single person who meets the criteria and is receiving the full pension plus supplements of about $24,000 a year will be able to draw another $12,000 from their home equity – taking their total annual cashflow to about $36,000 a year.
To qualify, you or your partner have to be at least age pension age, own your own home outright or own an investment property outright, have adequate insurance and not be a bankrupt. The loan can be repaid in full or part at anytime.
The full amount of the loan, plus interest owed at the time of death, will be recovered from the pensioner's estate.
Financial experts believe there could be strong uptake of the new scheme, particularly among singles on the age pension.
Currently, about 1.8 million age pensioners own their home, including 1.1 million on the maximum rate age pension and 700,000 part-rate age pension.
National Seniors Australia chief advocate Ian Henschke says the reforms are good news for retirees, allowing a couple to borrow almost $56,000 a year against their home at a relatively low interest rate of 5.25 per cent.
“Retirees can be averse to downsizing from the family home because it impacts on the age pension, but income from the pension loan scheme is free of the pension asset test,” Henschke says.
My advice is to get in early if you think the scheme may suit you, as I imagine the lead times could be long
“Rather than being asset rich and cash-poor, they can now have a more comfortable level of retirement. It also could go a long way to reducing pensioner poverty, given 75 per cent of pensioners are homeowners."
However, financial advisor Brendan Ryan, from Later Life Advice, warns people to remember that the scheme is not a payment from the government.
“And because of this, those later in life will have to think carefully about the risks and implications of taking part in the scheme, “ he says.
Still, Australians are looking for income in retirement and the idea of a suitable government-run reverse mortgage that trickles in fortnightly and has a low interest rate could be really suitable for many, Ryan says.
The government has allocated just $11 million over five years to the scheme which suggests it sees a slow initial take-up, Ryan says.
The previous pension loans scheme failed to take off largely because full age pensioners and self-funded retirees were excluded. The old scheme had just 800 participants in 2015.
The government expects up to 6000 retirees will take up a the new scheme in the first three years.
“However, this is a scheme that was costed in the federal budget announced in May, 2018. Fast forward a year, and interest rates are lower and are starting to bite and a range of costs for those in later life are moving ahead faster than inflation, so I think take up will be stronger than the government expects,” Ryan says.
The scheme increases the options for people later in life to manage their spending and how they access their wealth, he says.
“My advice is to get in early if you think the scheme may suit you, as I imagine the lead times could be long,” he says.
“Make sure you apply for everything you’re entitled to, and make sure you put in the time to carefully plan lifetime spending and understand your options "
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