The recent federal government budget outlines proposed changes to the Pension Loan Scheme, which will expand the scheme for eligible age pensioners. Financial advisor Justin Cilmi explains the changes and outlines how the scheme could be used to top up your home care package to meet your care needs.
The Pension Loans Scheme (PLS) is a non-taxable loan provided by the Australian Government, for those who need extra help for a short-time or an indefinite period.
The current key characteristics of the PLS in 2018 include:
- There is no lump sum
- If the grant application is approved, loan payments are made fortnightly
- You can choose the amount of loan paid each fortnight, up to the maximum rate of Age Pension that you qualify for
- Loan payments are not taxable income
- You can request to stop loan payments being made to you at any time
- If you already get the maximum rate of Age Pension, you cannot claim on the PLS.
Federal Budget 2018 proposals
It has been proposed in the recent Federal Government Budget announced on May 8, 2018 that from July 1, 2019, the Government will expand the scheme by:
- Extending eligibility to all clients of age pension age including maximum age pensioners, and
- Increasing the maximum amount of payment from 100% to 150% of the maximum rate of age pension.
While the overall maximum amount of payment is 150% of the maximum rate of Age Pension, the actual limit depends on the client’s age, how long they intend to receive payments, whether they are single or partnered, the value of their home and the rate of Age Pension they receive. These restrictions ensure they do not have to pay back more than their home is worth.
We note that at the time of writing, the budget measures have not yet been passed as law, so remain only proposals.
Eligibility to claim PLS
You may be able to apply if you:
- or your partner are of age pension age
- own real estate in Australia that you use as security for the loan
- or your partner receives a rate of payment that is less than the maximum amount or nothing due to either the income or assets test but not both
- you meet Age Pension residence rules
If you get less than the maximum rate of any of the following payments you can apply for a loan:
- Age Pension
- Bereavement Allowance
- Carer Payment
- Disability Support Pension
- Widow B Pension
- Wife Pension
Interest rate and costs
You’ll get a confirmation letter from Centrelink once the loan has started. This will also confirm the costs you must pay. You can choose to pay costs immediately or have Centrelink add these to your outstanding loan balance. If added to the loan balance, this will attract interest charges.
Interest rate
Centrelink currently charge 5.25% compound interest on the outstanding loan balance.
Interest is added to the outstanding loan balance each fortnight until you repay the loan fully. The longer you take to repay the loan, the more interest you pay.
The outstanding loan balance is:
- the amount you borrow, plus
- interest, plus
- any costs, minus
- any repayments you made
Repayment of the loan
You can repay the loan you get under the Pension Loans Scheme in part or full at any time.
If you want to sell the property used as security for the loan, you need to contact Centrelink before doing so. You can either transfer the loan to another property including your new home or you can repay the loan on the date of settlement.
If there is an outstanding loan after your death, your estate or in some cases your surviving partner’s estate can make repayments.
Practical use of Pension Loans Scheme
As seen from the information above, the PLS can provide additional income in times of need, however, as the loan is secured against real estate assets (generally being the family home), it is a loan service that many people do or should engage unnecessarily.
However, a practical use of this service could be where a person is currently eligible for a Level 4 Home Care package, however, is only able to receive a Level 2 package, due to restricted availability.
This difference in needs (Level 4 package of $49,000 pa) versus funding available (Level 2 of $14,500) represents a funding shortfall of $34,500 for a family or $1,327 per fortnight.
Current rules
Remembering that under the current rules, only part-pensioners are able to access the PLS and can receive payments up to the maximum rate of income support they qualify for.
So, assuming a couple are entitled to a part pension of $1,000 per fortnight and have a Home Care funding shortfall of $1,327 per fortnight (as discussed above), they may be able to access the PLS to fund $1,000 per fortnight (being equal to the level of Age Pension they qualify for).
Now the family have reduced their shortfall to $327 per fortnight.
Proposed rules
Using the example above, however, assuming the proposed rules changes announced in the 2018 Federal Budget have come into effect, the family may now be able to access 150% of the income support they qualify for.
They currently qualify for $1,000 per fortnight Age Pension, thus equating to a PLS of up to $1,500 per fortnight (being 150% of their Age Pension entitlement).
Under the proposed rules, they will have been able to cover the increased cost of Home Care needed, whilst they wait for a Level 4 Home Care package to be assigned.
It is important to note that under this scenario, if the family are not making repayments, the loan balance will continue to rise over time. Refer to the ‘Interest Rates and Costs’ section above for more detail.
Author
Justin Cilmi
Justin joined the financial planning industry in 2001 and is committed to providing practical and effective solutions for his clients. As a financial adviser, Justin has provided advice to clients across a wide range of areas, including wealth creation, wealth protection and personal insurance, redundancy, retirement and Centrelink and Aged Care planning.
Justin’s qualifications include a Bachelor of Commerce (Majoring in Finance and Economics), a Graduate Certificate in Applied Finance, an Advanced Diploma of Financial Planning and holds a specialist accreditation in Self Managed Superannuation Funds. Justin is also a member of the Financial Planning Association of Australia, holding a Financial Planner AFP® accreditation.
Disclaimer
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.