Q. With interest rates being reduced on our fixed deposits, we are struggling to meet our daily living expenses. I have been told the government will lend us money against our home to supplement income. Is this correct? My wife is 75 and I am 77 years old and our home is worth about $850,000.
A. The Pensions Loan scheme (PLS) is broadly available to retirees of Age Pension age who own Australian property and meet Age Pension eligibility requirements.
Important changes take effect from 1 July 2019 that mean more people will be eligible to apply and the amount you can apply for increases. For example, the requirement for an individual to qualify for a pension under the means test for ceases effective 30 June 2019.
The PLS operates like a reverse mortgage. Typically it suits older Australians who are asset rich but income poor. Unlike a conventional reverse mortgage, pensioners cannot borrow a lump sum, rather it is paid on a fortnightly basis.
Under the current PLS, recipients are only able to supplement their fortnightly pension up to the maximum age pension rate available. However, from 1 July recipients can borrow up to a maximum of 150% of the maximum fortnightly Age Pension rate. The PLS will continue to be payable until the recipient reaches their maximum loan amount.
The maximum loan depends upon your age when you apply for a loan, the value of your property and how much equity you would like to retain in your home.
The maximum loan amount is broadly calculated by applying a factor based on the age of the youngest owner of the property multiplied by the value of the property divided by $10,000. As your wife is the youngest at 75, the calculation would be $3,750 x $850,000 divided by $10,000 = $318,750.
If you wish to retain greater equity in the property to be guaranteed to your estate on your death, then the portion you wish to retain would not be factored into the calculations. For example, if you wanted to retain $300,000 of equity, the maximum loan would be $3,750 x $550,000 divided by $10,000 = $206,250.
The maximum loan is not fixed and can be varied as your circumstances change. Existing PLS recipients are eligible to extend their loans up to 150% of the maximum fortnightly Age Pension rate subject equity and age restrictions.
Interest accrues against the debt until the loan is repaid. The current interest rate charged is 5.25% per annum (capitalised fortnightly) and has remained unchanged since December 1997.
You are responsible for paying all costs associated with the loan e.g. legal fees.
The loan is generally repaid from your estate, however, if you receive a windfall gain such as an inheritance or sell the property you can repay the loan all or in part at any time. The outstanding loan balance will comprise the principal loan amount plus accrued interest plus costs minus any amounts already repaid.
Top up pension payments received from a PLS are not assessed for income or assets test purposes. Payments received do not count as taxable income nor are they counted towards taxable income in calculating Senior and Pensioners Tax offset or the Low Income Offset.
Before deciding to establish a PLS, there are a number of issues you should consider: You will be reducing the equity in your home as a consequence of the amount you borrow. You need to consider the impact of the compounding effects of the interest costs over time. If you need to move into an Aged Care facility, you may impact your ability to pay future accommodation costs. You also need to consider the consequences for the surviving spouse if they do not have title to the property or are not a beneficiary of the property.
Contact a Financial Information Service officer at Centrelink to determine the next steps or visit www.humanservices.gov.au.
Q. I have made the decision to invest in a Lifetime Annuity that pays me a regular income for the rest of my life to supplement my Age Pension. I was advised to commence the income stream on or after 1 July 2019, could you please explain why?
A. A Lifetime annuity is an income streams product whereby you invest a lump sum in return for a guaranteed income stream for the remainder of your life.
Annuities can either be sourced from superannuation or ordinary money. The income payments on an annuity are determined actuarially based on the term of the income stream, prevailing interest rates at the time of purchase and any guarantee period or residual capital value available at the end of the term or upon death.
For Age Pension purposes, a Lifetime annuity receives favourable treatment for assets and income test purposes.
Broadly speaking, for lifetime annuities commenced before 1 July 2019, the assets test value of a Lifetime annuity reduces each year as a proportion of the income payment is considered a return of capital.
For income test purposes, the annual annuity payment less an exempt non-assessable portion of the payment will be assessed as income.
New means testing rules will apply to lifetime income streams commenced from 1 July 2019. Broadly, under the new income test rules, 60 per cent of the annual income payments will be assessed as income for Centrelink purposes.
Provided the Lifetime Annuity complies with certain requirements, 60 per cent of the purchase price will be assessed as an asset from commencement until age 84. Provided the Annuity has been in existence for 5 years, from age 84 only 30 per cent of the purchase price will be assessed for assets test purposes until the end of the income stream.
I suspect it is because of the favourable immediate Assets Test treatment that it has been suggested you wait until after 1 July 2019 to commence the income stream. This may result in an immediate 40 per cent discount in the asset tested value of your annuity. Note this asset test advantage is only likely to last for seven to eight years compared to income streams commenced before 1 July 2019.
Given the restrictive nature of Lifetime Annuities, the annuity income plus any increase in social security benefits should be carefully weighed up and compared to alternative investment options.