What is the Pension Loans Scheme?

Exploring your available income options in retirement can help you understand your financial situation. Not every retirement income option will suit your needs. Do some research, so you don’t miss an opportunity to supplement your Government Age Pension payments and super savings. In this article we’ll look at the Pension Loans Scheme.

For homeowners who are eligible, one retirement income option is a government initiative called the Pension Loans Scheme (PLS). It allows retirees who meet certain criteria to turn the equity in their homes into an income stream.

The Pension Loans Scheme (PLS)

Put simply, the PLS allows property owners to take advantage of the equity in your home by borrowing money against the value of your property. You’ll receive that money as a fortnightly income stream – it isn’t paid to you entirely as a lump sum like other loans for pensioners are. You can choose how much you receive each fortnight – it could be up to 1.5 times your personal Government Age Pension entitlement (GAP payment).

AustralianSuper retirement expert Louise Aracas, says: ‘There’s a range of options to explore when it comes to funding your retirement — the Government Age Pension (GAP), your super savings, and any non-super savings, such as owning a property. To get the best retirement outcome many people need to take advantage of all 3 options in some way. For property owners, the Pension Loan Scheme is one option to consider, and it means you don’t necessarily need to sell your house to access the equity.’

‘As with any financial product you need to have a plan. Knowing how and when you’ll get in and get out of a scheme or product can often be the key to attaining a beneficial outcome. The PLS relies on a several personal variables, so it’s always good to start off speaking to an adviser,’ says Aracas.

Eligibility for the Pension Loans Scheme

To be eligible you need to be receiving one of the following pension types:

  • Government Age Pension
  • Bereavement Allowance
  • Carer Payment
  • Disability Support Pension
  • Widow B Pension
  • Wife Pension

In addition, you need to:

  • be of Government Age Pension age
  • own real estate in Australia to use as security
  • have appropriate insurance covering that real estate
  • not be bankrupt or subject to a personal insolvency agreement.

If you own real estate, the Pension Loans Scheme could be something to consider to boost your retirement income. But it’s a complex scheme, with several criteria that need to be explored in detail in relation to your personal situation. Speak with a qualified financial adviser and visit humanservices.gov.au for more information.


Key differences between a reverse mortgage and the Pension Loan Scheme

While taking out a reverse mortgage and applying for the PLS are both ways to turn the value of your home into an income stream, there are big differences between them.

With a reverse mortgage:

  • You must make repayments while you live in your home, and interest is added to the full loan balance.
  • The income or capital you receive comes from a financial institution, such as a bank or lender.
  • The interest rate is typically higher than the PLS interest rate. This PLS interest rate is set by the Government and is 4.5% per year1.

With the PLS:

  • You draw an income from the equity in your home over time.
  • You accrue interest on the income as you receive it until you pay off the loan.
  • You can also choose to stop receiving PLS income at any time if your needs change – you’re not locked in.
  • The loan can be repaid in part or in full at any time and you don’t have to repay anything until you exit the scheme which happens if you choose to pay off the loan, or if you pass away.
  • Repaying the money you receive through the PLS can be done in part or full whenever you’re ready or able. Any balance owing is taken from the value of your property if you choose to sell it, or when you and your surviving partner pass away.
  • The income you’ll receive comes from the Australian Government – the same as your GAP payments.
  • Compound interest is calculated fortnightly on the amount you’ve been paid to date – not the total amount you’re eligible to receive over time.

Repaying the Pension Loans Scheme

Repaying the money you receive through a PLS loan can be done in part or full whenever you’re ready or able, and any balance owing is taken from the value of your property if you choose to sell it, or when you and your surviving partner pass away.

The income you’ll receive comes from the Australian Government — the same place as your GAP payments.

When it comes to the PLS, the Government is responsible for setting the interest rate, which currently sits at 4.5% per annum1. Compound interest is calculated fortnightly on the amount you’ve been paid to date — not the total amount you’re eligible to receive over time.

Proposed changes to the Pension Loans Scheme from 1 July 2022 

To increase the flexibility of the PLS, from 1 July 2022, the Government aims to:

  • Introduce a No Negative Equity Guarantee for PLS loans.
  • Allow age pensioners access to a capped advance (up to 26 fortnights worth of top-up payments) in the form of a lump sum payment. The scheme will provide immediate access to lump sum payments of around $12,385 for singles, and $18,670 for couples.

No Negative Equity Guarantee means borrowers under the PLS, or their estate, won’t owe more than the market value of their property. This brings the PLS in line with private sector reverse mortgages.

AustralianSuper members

If you’re a member of AustralianSuper, you have access to professional financial advice on a fee-for-service basis. You can speak with an advice team member to arrange an appointment, or find an approved adviser.

EXPLORE ADVICE OPTIONS

References

1 Interest rate correct at time of publication. For the most up to date information visit humanservices.gov.au.


This information is general financial advice which doesn’t take into account your personal objectives, situation or needs. Before making a decision about AustralianSuper, you should think about your financial requirements and refer to the relevant Product Disclosure Statement. AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788, Trustee of AustralianSuper ABN 65 714 394 898.

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