Pension Loans Scheme should have much greater use
The little-known Pension Loans Scheme allows asset-rich but cash-poor retirees to top up their part-pension income to the full amount via a loan from the government, effectively unlocking the value of their assets.
Investment in Australian residential real estate ties up an estimated $5.2 trillion in capital and unlocking this capital may hold some of the solution to relieving the pressure on the government’s budget. The expected future deficits are partly caused by the looming shortfall in retirement savings estimated at over $700 billion.
Various solutions to over-hauling the Australian retirement system have been suggested including making the superannuation tax concessions more equitable. If it ever passes the Senate, Joe Hockey’s budget will enact measures that will reduce the level of the federal government’s future aged pension payment commitments while also extending Australians’ working lives.
But industry experts are increasingly looking at how equity tied up in residential real estate could become a potential fourth pillar of the retirement system.
Currently the most common method of unlocking equity in the family home is to take out a reverse mortgage. Reverse mortgages can be taken as a lump sum or as an income stream. With no repayments, the capitalising interest on the loan can become ruinously expensive in the long term. But as John Maynard Keynes once observed, “In the long run we are all dead”, which is precisely the point.
How does the Pension Loans Scheme work?
A less well-known alternative is the Pension Loans Scheme (PLS), administered by Centrelink, part of the Department of Human Services. The PLS allows asset rich (home owners) but cash poor retirees, who miss out on receiving maximum pension payments, to top up their pension income stream to the maximum amount via a loan from the government.
Retirees may be eligible if they (or their partner) are of age pension age and have real estate to offer as security in Australia but only receive a part pension. The amount of the loan available may depend on the amount of collateral offered and the age of the retiree. The loan can be paid back anytime but must be repaid either when the house is sold or from the owner’s estate when they die.
The pension loan has a 5.4% effective annual interest rate (charged at 5.25% fortnightly), which compares favourably with commercial reverse mortgages interest rate of around 7%. It is likely that the overall uptake of the PLS will increase as the number of Australians that only qualify for a part pension increases, if people know about the scheme.
Call to broaden eligibility
Think tank, The Australia Institute, has recently floated the idea in their report ‘Boosting retirement incomes the easy way’ that the PLS should be made available to all Australians of pension age, rather than just those too well off to receive a full age pension. “The expanded PLS would let pensioners boost their incomes using their own equity, without cost to the budget,” says The Australia Institute report.
The report notes however that there may be opponents to an expansion of the PLS on ideological grounds. Economists generally agree that private sector financial intermediaries are the most appropriate distributors of credit across the economy. Maturity transformation is what private sector financial institutions do. The Australia Institute’s proposal would involve a further opening up of the federal government’s balance sheet to the residential housing sector.
However if the cuts made to the aged pension level in the recent budget begin to bite and the population demographic continues to age, a less traditional economic stance might find favour.
Private sector financial institutions are already stepping up with innovative new home equity release products. A recent Cuffelinks article by Christine Brownfield on home equity release noted some of the difficulties slowing the rate of product innovation, including the small size of the home equity release market currently; the public’s emotional attachment to the family home; a lack of product providers, and the current absence of the government backing that may be required to build residential equity into a significant fourth retirement pillar.
In the meantime, the PLS offers a competitive interest rate on flexible terms, and may provide a valuable income top up for many people in retirement.
Les Goldmann has over 20 years’ experience as a Chartered Accountant, and his roles have included freelance journalism, shareholder advocacy for the Australian Shareholders Association and senior roles in the commercial and non-profit sectors. This article provides general information and does not constitute personal advice.
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