Wednesday 26 September 2018
Pension loans scheme
Wednesday 26 September 2018
What is the Pension Loans Scheme?
The Pension Loans Scheme (PLS) is a loan facility administered by Centrelink which provides certain individuals with the ability to increase their age pension payments up to the maximum pension rate (proposed to be increased to 150 per cent of the maximum pension rate from 1 July 2019). The loan is secured against real property. Repayment can be made at any time, but is required upon the sale of the property or upon death.
To qualify for the PLS an individual must:
- be of age pension age, or be the partner of an individual who is age pension age
- qualify1 for a pension2 under the income test or assets test (but not receive the maximum rate of pension), and
- own Australian real property of sufficient value to secure the loan.
- In the May 2018 Budget, the Government announced an extension to the PLS. If legislated, the changes will mean that all Australians of age pension age, including maximum rate age pensioners, will be able to access the scheme from 1 July 2019.
The PLS will loan an amount up to the difference between an individual’s current pension entitlement (possibly nil) and the maximum rate of pension, each fortnight. As part of the changes announced in the May 2018 Budget, the loan amount is proposed to be increased to 150 per cent of the maximum rate of pension from 1 July 2019. This will allow full rate pensioners to receive an extra 50 per cent in the form of a loan.
See the Macquarie Big Black Book for details of the age pension rates and thresholds.
The maximum loan depends on the following factors:
- age of the individual or, for couples, the age of the younger partner at the time the loan is granted
- value of the property, and
- the equity the individual wishes to keep in the property.
It is calculated using the formula:
Age component x
Value of real estate equity310,000
The age component (see table below) is based on the age of the individual or the age of the youngest member of a couple. The Government has stated that these amounts will continue to apply when the PLS is extended from 1 July 2019.
|Age||Age component||Age||Age component|
|72||3,330||90 and over||6,750|
The home of Joe (age 69) and Jan (age 65) is valued at $560,000. The PLS allows them to borrow up to: 2,530 x (560,000 / 10,000) = $141,680
The maximum loan amount is not fixed. It is recalculated once every 12 months in January or July following the individual's birthday to adjust for the higher age component available.
The PLS payments are made fortnightly and stop when the loan reaches the maximum loan amount. Interest continues to accrue until the loan is repaid.
An existing mortgage over the property generally does not disqualify the individual from the PLS. However, the conditions of the existing mortgage contract may prevent an additional charge being placed over the property.
In addition, the existing mortgage should be considered when valuing the property for the purposes of determining the maximum loan available.
The PLS is secured via a statutory charge over the real property. Security details include:
|What||Any real estate, including the family home and business real property|
|How||Centrelink will register a charge over the property(s) with the Land Titles Office. The individual pays this cost or it is added to the loan.|
|Valuation||Valued independently by the Australian Valuations Office. This is done at no cost to the individual.|
|Multiple Properties||If the individual has more than one property, they can exclude some of the properties from the assessment.|
|Retained Equity||The individual may choose to retain equity in the property. This amount is deducted from the value of the property offered as security for the loan.|
Treatment of Payments
Where the loan is held against an assessable asset, the value of the asset for means tests purposes is decreased by the outstanding amount of the loan. This may have the effect of increasing the amount of income support the individual is eligible to receive.
This does not apply if the loan is held against the principal home which is not an assessable asset under the social security means tests.
Taxation of Payments
The loan payments are not assessable and not taxable. See TD 96/14.
In addition, they are not counted for the purposes of the Seniors and Pensioners Tax Offset or the Low Income Tax Offset.
|What Interest rate||5.25% pa compounded fortnightly (unchanged since 25 Dec 1997)|
|Deductibility||Interest is generally tax deductible if the loan is used to purchase income producing assets|
The Government has stated that this rate will continue to apply when the PLS is extended from 1 July 2019.
Commonwealth Seniors Health Card Eligibility
PLS payments are not included in the calculation of adjusted taxable income for the purpose of the Commonwealth Seniors Health Card.
The loan can be repaid (in part or full) at any time.
If the individual wishes to sell a property that is used as security for the PLS they will be required to repay the loan from the sale proceeds, or offer and have accepted a new property as security for the loan.
The Commonwealth is generally not entitled to recover the loan until the sale of the property or death of the individual. The loan may be repaid from the estate after death. Where the deceased was a member of a couple and the surviving partner has use of the property and has reached age pension age, then the Commonwealth is unable to sell the property until after the death of the surviving partner.
- Preparing financially for a longer and more secure life, Budget 2018-19 Fact Sheet 3.
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