Old aged pensioners are not the dream client for many financial advisers. In some ways, this is fair enough: the limited means and advanced time of life for these clients means things that clients traditionally seek from a financial adviser may not be on the wish list for most old aged pensioners.
But in other ways it is a pity. While these clients will not make millions for an adviser, the feel good factor of assisting a client with very limited means can be enormous. This is because even a relatively small increase in such a client’s financial circumstances can have an out-sized effect on their wellbeing.
In one memorable situation, one of our advisers’ client was suffering from frugality. She could not even afford to get hair done, which was really making her miserable. She had always taken pride in her appearance, and now she simply could not afford to do so. She lived on her own in Hampton, an up-market suburb between Sandringham and Brighton, in suburban Melbourne. It was the old family home and it was all she had. She was not leaving. Too many memories.
The adviser’s draft SOA only dealt with pension entitlements. We suggested some improvements and the final SOA included paragraphs on:
- getting a lodger in, for company and cost sharing. Board income of less than $160 per fortnight does not affect the Centrelink pension via the income means test; and
- implementing a small scale reverse mortgage strategy to free up $500 cash a week without impacting the old age pension.
The client loved the advice. She has a youthful co-tenant, a student who has moved to Melbourne from the country, who she sees herself as helping. But best of all, she can get her hair done once a fortnight again.
Reverse mortgages do not suit everybody. But for this lady, the home she lived in was worth well over $1.5 million. She was drawing less than 2% of the value of the property each year.
You can read Dover’s views on reverse mortgages here: Dover’s views on reverse mortgages. As you can see, used carefully, they can be great and very appropriate to your client and very much in your client’s best interests.
Another kind of loan arrangement that has much in common with a reverse mortgage is provided by Centrelink.
Centrelink’s Pension Loan Scheme (PLS) allows a retired person on a part age pension to borrow modest amounts against the security of their home (or other property) at 5.4% per annum interest to subsidise their living costs.
The PLS is a limited scale and safe reverse mortgage.
The amount of the loan is limited to the difference between the full pension and the part pension, so in a way it’s a top up facility. It’s paid fortnightly as part of the usual age pension payment process.
Not everyone is eligible. Persons who receive a full age pension are not eligible. And persons who fail both the assets test and the income test are not eligible. Interestingly, people who fail just one of these tests (and therefore do not receive any pension at all) are also eligible.
PLS loans are not that common, and it’s hard to see why. They make a lot of sense, and the relatively low cap, i.e. the difference between the actual pension and the full pension, means it’s unlikely age-pensioners will be evicted from their homes by Centrelink.
If a married couple’s client’s part pension was say $5,000 and their full pension $23,160 the amount of the loan would be capped at $18,160 a year or about $700 a fortnight. If their home is worth say $700,000, and is otherwise unencumbered, it is unlikely that the loan will ever catch up with the value, or even come close.
The extra $700 a fortnight will make all the difference to your client’s day-to-day quality of life and allow them to avoid selling their home or other quality assets.
Let your older clients know about the Centrelink PLS. It’s a great idea and awareness of it can help reduce the anxiety of ageing.
You can learn about the Centrelink PLS here: Centrelink Pension Loan Scheme.