Q. As a result of the changes to the Assets test from 1 January 2017, the Age Pension my wife and I receive will reduce dramatically. We will not be able to meet our living expenses from the earnings from our Allocated Pensions and Age Pension. I have been told the government will lend us money against our home to supplement income. Is this correct? My wife is 77 and I am 79 years old and our home is worth about $800,000.
A. The Pensions Loan scheme (PLS) is available to Pensioners through Centrelink or the Department of Veterans Affairs (DVA).
To be eligible you must be of Age Pension age, own Australian property to secure the loan, meet Age Pension residency requirements, be eligible to receive a reduced age pension entitlement or a nil entitlement based on the Assets test or the income test. If you would not qualify for the Age Pension under either test, you will not be eligible for the PLS.
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 and are only able to supplement their fortnightly pension up to the maximum age pension rate available in aggregate.
The maximum loan depends upon the age 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 calculated by applying a factor based on the age of the youngest owner of the property multiplied by the value of the property, then divided by $10,000. As your wife is the youngest at 77, the calculation would be $4,050 x $800,000 divided by $10,000 = $324,000.
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 $4,050 x $500,000 divided by $10,000 = $202,500.
The maximum loan is not fixed and can be varied as your circumstances change. 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. Costs may include legal fees, establishment fees and discharge fees. Loan establishment costs vary from state to state but are estimated at around $550 to $600.
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 embark upon 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 seriously 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.
If you decide a PLS still has merit, you will need to arrange an interview with a Financial Information Service officer at Centrelink to determine the next steps.