Financial planning is really about… Centrelink’s pension loan scheme (PLS)

Centrelink’s 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, given the full pension of $23,160, the amount of the loan would be capped at $18,160 a year or about $700 a fortnight. If the couple’s home is worth say $700,000, and is otherwise unencumbered, it is unlikely that the loan will ever catch up with it’s value, or even come close.

The extra $700 a fortnight might make all the difference to this couple’s day-to-day quality of life and may even allow them to avoid selling their home or other quality assets. On the $700,000 home, if the capital growth was just 2.6%, then the amount of growth would be more than the $18,160 being borrowed by the couple each year. Given the long-term (twenty year) rate of return for residential property is more than 10%, the strategy should be a good one and will even make sense for the eventual beneficiaries of the estate.

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.

The Dover Group