Pension Loans Scheme to be extended: beware the pitfalls

Article published 1 February 2019

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THE current Pension Loans Scheme provides a fortnightly top-up of retirement income for people of pension age who miss out on the pension because either their income or their assets (but not both!) are too high. It is also for part-rate pensioners.

The current income top-up is up to the full rate of the relevant pension payment.  The top-ups are fortnightly and are loans secured against real estate owned by the borrower and repayable upon the sale of security property.

In other words, it’s a reverse mortgage without the possibility of a lump sum withdrawal. The (compound) interest rate is lower, but not much. The current Pension Loans Scheme rate is 5.25 per cent, while the commercial rate is about 1 per cent higher.

Subject to legislation passing, from 1 July 2019, the Pension Loans Scheme will be extended in two ways.

First, the scheme will be thrown open to all people of Age Pension eligibility age.

Second, the maximum fortnightly income top-up will be up to one-and-a-half times the full rate of the relevant pension payment. This means someone on a full rate pension can get a top-up of 50 per cent of their pension payment, while a self-funded retiree can get a top-up of 150 per cent. Part pensioners can get top-ups at rates somewhere in between 50 and 150 percent depending on the rate of their pension.

Even though it’s a Government loan and you may think it’s therefore safe, all the usual drawbacks applying to reverse mortgages and equity release generally apply here as well.

The maximum overall loan amount withdrawal will be limited to between 20 and 25 per cent of the value of the security.

Once you sell, you have to repay the loan plus interest, so watch out if you think you may need money for a nursing home bond at some point.

The top-up you get will be assessed under the pension income test and may reduce your part or full pension.

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