Pension loans scheme


Sunday 01 April 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 amount. 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.


Qualification criteria

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 entitlement), and
  • own Australian real property of sufficient value to secure the loan.

Payment Amount

The PLS will loan an amount up to the difference between an individual’s current pension entitlement (possibly nil) and the maximum pension entitlement, each fortnight.

See the Macquarie Big Black Book for details of the age pension rates and thresholds.


Maximum Loan

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.

AgeAge componentAgeAge component
<55 1,710 73 3,460
56 1,780 74 3,600
57 1,850 75 3,750
58 1,920 76 3,900
59 2,000 77 4,050
60 2,080 78 4,210
61 2,160 79 4,380
62 2,250 80 4,560
63 2,340 81 4,740
64 2,430 82 4,930
65 2,530 83 5,130
66 2,630 84 5,330
67 2,740 85 5,550
68 2,850 86 5,770
67 2,960 87 6,000
70 3,080 88 6,240
71 3,200 89 6,490
72 3,330 90 and over 6,750

Example

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.


Security

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.


Interest

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

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.


Repayment

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.

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1 A person may qualify for the PLS if they receive a nil rate of payment due to either the income or assets test. They will not qualify if they receive a nil rate of payment due to both the income and assets test.

2 Recipients (and partners in some cases) of age pension, disability support pension, carer payment, widow B pension, bereavement allowance, wife pension, veterans’ service pension or income support supplement may qualify.

3 Rounded down to the nearest $10,000.

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The information provided is not personal advice. It does not take into account the investment objectives, financial situation or needs of any particular investor and should not be relied upon as advice. Any examples are illustrations only and any similarities to any readers’ circumstances are purely coincidental.

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