A government run reverse mortgage scheme? We take a look.
The Pension Loans Scheme is essentially a government run reverse mortgage scheme.
A reverse mortgage is a way of borrowing against your home. In this case, drawing down a payment that is like an income stream, to be paid back once your house is sold.
A loan like this is of use to Australians with value tied up in their home, but who may not have enough savings to support day-to-day expenses. The ASIC MoneySmart website offers more detail on the pros and cons of such a loan.
As a government run scheme, the Pensions Loan Scheme has a few differences - such as a cheaper rate of borrowing, however generally the same rules apply as any reverse mortgage.
In the recent Budget, the government announced a few changes to the Pension Loans Scheme. These changes have now been passed in Parliament.
The scheme is now open to any Australian of Age Pension age, and the maximum rate of loan has been increased.
Like most government programs, it can be hard to get to the bottom of what it means to you without getting lost in all the misleading terms and confusing thresholds. And there is plenty about this scheme we do not know.
It is worth highlighting that the Scheme in its present form - which allows part pensioners to increase their income to match the full rate pension, has had very little take up. Whether this is because of lack of knowledge, difficulty in applying, or lack of demand, is hard to know.
Putting all of this aside - you should consider whether this scheme is a match for your needs - now or in the future.
Do you need to borrow from the government?
Planning your lifetime spending involves complex decisions. Your spending is going to be a mix of investment earnings, a drawdown of your savings, and support from the government. And don’t forget all the cost savings you may eligible for - it’s going to take a lot of effort to keep organised and make the most of them.
Somewhere down the track, the Pension Loans Scheme may make sense to your situation. A drawdown against your home, in conjunction with spending from savings and government support may make sense.
Putting this together can be confusing. We can help.
The ASFA Retirement Standard
Please consider the ASFA Retirement Standard.
The ASFA Retirement Standard benchmarks the annual budget needed by Australians to fund either a “modest” or ‘comfortable” standard of living in the post-work years. It is updated quarterly to reflect inflation, and provides detailed budgets of what singles and couples would need to spend to support their chosen lifestyle.
For an Australian just entering retirement, the ASFA Retirement standard is a valuable resource in trying to get to the bottom of what life is going to cost.
We refer to this standard in looking at how much the Pension Loans Scheme may help.
The ASFA Retirement Standard and the Pension Loans Scheme
In the changes announced in the Budget, the maximum rate at which the Pension Loan Scheme could be paid out will be increased to 150% of the maximum age pension. There is a single and a couple rate.
Interestingly, 150% of the maximum age pension lands somewhere in the middle of the “modest” and “comfortable" amount of income required in "post-work years" as predicted by the ASFA Retirement Standard).
What does this mean to the Australians able to participate in the program?
It’s worth knowing that down the track, the Pension Loans Scheme may help offer you income at a rate somewhere between “modest” and “comfortable” if you need it. Better still, you could organise for it to supplement the mix of savings and government support so you have some kind of savings in reserve in case of the unexpected.
This should be part of the planning that goes into your lifetime spending.
It always helps to look at what you are spending now, and think carefully about how things may change in the future.
The reality is that you will never predict with 100% certainty what the future will bring. However, with some thought and a commitment to ongoing adjustment and revision of your plans, you have a much better chance of getting it right.
Later Life Advice can help.