Pension Loan Schemes - much more attractive now
Written on the 1 June 2021 by Parkside InvestorPlus
In a recent article I wrote about some options to tap into the built-up equity in your home in the event you need more funds to live off in your retirement.
To recap, a Pension Loan Scheme (PLS) is a form of 'reverse mortgage' offered by the federal government.
Basically, it allows borrowers, (over Age Pension age), to receive a tax-free fortnightly income stream by taking out a loan against the equity in their home.
A reverse mortgage works a little like a home loan in reverse. It's a loan that allows you to borrow money against the equity (or value of a property less any mortgage debt) you have in your home.
The great thing about a PLS is that you can stay in your home and do not have to pay the loan if you are living there.
The debt is eventually recovered once the property is either sold off or from the person's estate once they pass away.
As attractive as this sounds, the take up of PLSs has not been very high.
It could encourage people to stay in large unsuitable home and be increasingly housebound, lonely and socially isolated, while at the same time being in a scheme that may eat into the inheritance they want to give their children or doesn't help them remove an unwanted mortgage.
A Pension Loan Scheme is not a solution fit for all people.
Pension Loan Schemes Post 2021 Budget
However, PLSs might now be more attractive to seniors post the May 2021 Federal Budget for two main reasons.
First, the introduction of lump-sum payments.
From 1 July 2022, anyone who's in a PLS will be able to access up to two lump-sum payments in any 12-month period (up to a value of 50% of the maximum annual rate of the Age Pension).
This change might help with the take up of Pension Loan Schemes simply because it will allow seniors more flexibility to pay off large one-off expenditures for example, making home improvements or renovation or even to pay for aged care services.
The second big change is the introduction of a No Negative Equity Guarantee from 1 July 2022.
Essentially this guarantees the borrower will not need to repay any more than the market value of their property.
What Would Make Pension Loan Schemes More Attractive?
Again, in theory, PLSs make sense and certainly sound attractive.
However, it comes down to education, sound advice and informed decision making.
First and foremost, there is a low level of awareness and understanding of retirement financial products let alone PLSs. When described in an easy to understand and absorb manner, a Pension Loan Scheme will make sense to most seniors who are looking to increase funds in their retirement.
Second, when it comes to retirement planning and financing, it's the usual suspects superannuation and aged pension benefits yet rarely are housing assets ever considered again most likely because of a lack of knowledge, information and understanding.
And finally, there may be a perception that a Pension Loan Scheme may somehow affect the children's inheritance yet typically it's not the thought of inheritance impact rather, the issue has not been discussed with both parents and children together in other words, a lack of communication and informed decision making.
As financial planners, our number one priority is to ensure our clients understand all the financial options available to them in their retirement period and to make sure everyone concerned (parents and children) understand these options along with the pros and cons of each.
At Parkside, we can help you align your aspirations and values with a financial plan so you can meet your retirement goals. If you have a high level of equity in your home and yet find it difficult to sustain your lifestyle due to a low level of income a PLS loan may be appropriate talk to us.
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