Pension loan scheme deserves a fresh look

Max Newnham


July 17, 2018

Traditionally, when preparing a plan for clients, there are many considerations. These can include when the clients will retire, how much they need to fund their desired lifestyle, the value of their assets and liabilities, and how they want their estate to be distributed upon their death.

I have come across a number of examples where clients with no children and no other relatives, rather than preserving their estate, want to use up their assets to maximise their lifestyle in retirement.

In this situation, the planner walks a tightrope to make sure the retirement assets fund the client’s lifestyle but don’t run out before the client dies.

My job for a recent client was made easier when he advised that his immediate relatives had not experienced good health and died quite young and, because he had been a heavy smoker all of his life and had a few ongoing health problems, wanted me to use his retirement assets plus his home to maximise his lifestyle expenditure until the age of 80.

He made it clear he was interested in looking at reverse mortgages and the pension loan scheme. Under a traditional reverse mortgage, a sum of money is borrowed from a lender that is not repaid until the property is sold.

Under the current pension loan scheme, a person or couple, which do not receive the full age pension because of either the income or assets test, can borrow an amount that is the difference between the pension they receive and the full age pension.

A policy announced in the 2018 Federal Budget will increase the amount that can be borrowed to the difference between the age pension received and 150 per cent of what the full age pension. This means a single person who does not receive the age pension, and who owns their own home, could theoretically receive a pension loan of $1239 a fortnight if the measure passes.

Under the pension loan scheme, fortnightly income payments are received instead of a lump sum, as is the case under a reverse mortgage. For someone eligible for the age pension, a lump sum could leave them worse off, due to the effect it could have on the age pension they would be eligible to receive under the assets and income test.

Another difference between reverse mortgages and the pension loan scheme is the costs and interest rates are much higher for reverse mortgages. Another problem with reverse mortgages is the limited number of financial institutions offering them.

The only two providers that I know of are Bankwest and Homesafe. Bendigo Bank offers an equity selling option, where the bank purchases a percentage of the property; however, Bendigo is very selective about which suburbs it makes available for this facility and is, therefore, not a viable option for planners.

If the 2018 Federal Budget increase in the amount that can be borrowed under the pension loan scheme is passed, the increase will apply from July 1, 2019.

The problem for my client was that he does not reach pension age until 2022. I modelled the effect of taking out a reverse mortgage now and compared that with taking lump sum superannuation payments from an accumulation account until he reached pension age and then commencing the pension loan scheme. With the pension loan scheme, his retirement assets lasted two years longer.

Although the pension loan scheme will not appeal to every client, it does provide planners with another weapon to help some enjoy retirement in a manner to which they would like to become accustomed.

TOPICS:   advice,  Max Newnham,  pensions

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