Lauren Cook and Don Arthur
The Government has announced three measures designed to help
older Australians with their finances:
- new means testing rules for innovative retirement income streams
- increasing and extending the Pension Work Bonus and
- expanding the Pension Loans Scheme.
New means testing rules for
innovative retirement income streams
In July 2017, regulations took effect that enabled the
development of new innovative lifetime retirement income stream products,
including pooled lifetime retirement products. However, it was unclear
how the means test rules for the Age Pension should apply to these new
products. The means test for the Age Pension applies an income test and an
asset test and whichever test results in the lower payment rate is applied.
In January 2018, the Australian Government sought
stakeholder views on the proposed means test rules for lifetime retirement
income streams. This included income testing 70 per cent of all
product payments as income, and asset testing a consistent asset value of
70 per cent of the product purchase price until life expectancy at
purchase, and 35 per cent for the rest of the person’s life.
This proposed approach was a change from current rules that incorporate
complicated capital reduction rules and deduction amounts in determining income
and asset amounts for the purposes of means testing.
In the Budget, the Australian Government announced new means
testing rules for Age Pension recipients who purchase pooled lifetime
retirement products after 1 July 2019. The new rules will assess
a fixed 60 per cent of all pooled lifetime product payments as
income, and 60 per cent of the purchase price of the product as
assets until age 84, or a minimum of five years, and then
30 per cent for the rest of the person’s life.
This measure is part of a package of measures designed to
improve retirement income choices, including requiring superannuation fund trustees
to develop a retirement income strategy, and requiring providers to simplify
product disclosure statements for retirement income products.
Peak body COTA Australia has welcomed these measures as a way to ‘improve the
standard of living for older Australians’.
The measure will cost $20.2 million over five years
from 2017–18 as the rate of payment for Age Pension calculated under the new
income and assets tests is likely to be higher for recipients with pooled
lifetime retirement products. This measure will require legislation.
Increasing and extending the
Pension Work Bonus
The Government is making changes to the Pension Work Bonus
to allow pensioners to keep more of their earnings. These changes are expected
to benefit around 88,750 social security pensioners, 1,000 allowees and around
3,000 Veterans’ Affairs pensioners. The Budget provides
$227.4 million over the forward estimates. This measure will require
How the Pension Work Bonus
The Pension Work Bonus encourages pensioners to earn
additional income through work. It is available to all pensioners over Age
Pension age, including recipients of payments such as Disability Support
Pension and Carer Payment.
The Pension Work Bonus works with the pension income test
free area. With the free area a single pensioner can receive up to $168 in
income per fortnight without it affecting their pension. The Pension Work Bonus
enables a pensioner to earn an additional $250 per fortnight without losing
pension income, but it operates differently from the income test free area.
There are two important differences. First, while the income
free area allows income from any source, only income from paid work as an
employee counts for the Pension Work Bonus. It does not include income from
self-employment or business income. Second, if a pensioner does not use their
full Pension Work Bonus amount in a fortnight, they can bank the unused part up
to a maximum of $6,500 and use it later. This is particularly useful for
pensioners who undertake intermittent or seasonal work.
Changes to the Pension Work Bonus
This budget measure makes two changes to the Pension Work
- the bonus amount will increase from $250 to $300 with the maximum
accrual account rising to $7,800 and
- eligibility for the Pension Work Bonus will be expanded to
include income from self-employment (with a ‘personal exertion test’ to exclude
income associated with returns on investments).
Expansion of the Pension Loans
The Pension Loans Scheme enables individuals over pension
age to borrow against the equity they have in their family home or other real
estate to obtain fortnightly payments. The loan can be repaid from the person’s
estate after they die. The Government is expanding the scheme to allow more people
to benefit and to increase the amount they can receive as an income stream.
Currently take up of the scheme has been low. In 2015 there
were around 800 participants. The Department of Social
Services expects around 6,000 people to take up a loan under the revised scheme
over the next four years.
This measure is expected to cost $11 million over the
forward estimates. It will require changes to legislation.
How the Pension Loans Scheme
The Pension Loans Scheme is a reverse mortgage scheme that
allows people of pension age to access an income stream by borrowing against
their housing equity.
The Pension Loans Scheme allows people to top up a part
pension to the full rate or, for those not eligible for any pension, receive
fortnightly payments equivalent to the full rate. It is open to people of
pension age (or their partners) who have equity in Australian real estate that
they can use as security for the loan. To be eligible the person or their
partner must receive no pension or a reduced rate of pension due to the income
or assets test (but not both). It is not available to those receiving the full
rate of pension. Compound interest is charged on the loan and it is normally
repaid if the home is sold or repaid from the person’s estate after their
The Government charges compound interest of 5.25 per cent on
the outstanding loan balance.
Changes to the Pension Loans Scheme
This measure expands eligibility for the Pension Loans Scheme
to all Australians of Age Pension age, including people receiving the full rate
of the pension and to self-funded retirees. It also increases the amount individuals
can receive as an income stream to 150 per cent of the Age Pension rate.
Stakeholder reactions and media commentary
Reactions to these budget measures have been mixed with some
stakeholders and commentators expressing scepticism about the benefits for
older people while others have reacted more positively.
The Combined Pensioners and Superannuants Association (CPSA)
labelled the Budget a ‘fizzer’, arguing that the Pension Work Bonus and Pension
Loans Scheme measures are minor.
Ben Oquist of the Australia Institute praised changes to the
Pension Loans Scheme as ‘sensible economic reform’ that could ‘make a real
difference to people’s lives’. Newspaper commentator
Daryl Dixon was also positive about changes to the scheme, noting that the 5.25
per cent compound interest rate was below the rates charged for commercial
In the West Australian, Nick Bruining and Neale Prior
were less enthusiastic about the Pension Loans Scheme noting that there are no
limits on the Minister for Social Services’ power to increase the interest
Laws Amendment (2017 Measures No. 1) Regulations 2017.
Department of Social Services (DSS), Means
test rules for lifetime retirement income streams, Position
paper, DSS, Canberra, 7 February 2018, p. 9.
Australian Government, ‘General provisions
for assessing income streams’, Guide to social security law, DSS
website, 11 May 2015.
Australian Government, Budget
measures: budget paper no. 2: 2018–19, p. 175.
Choices for a Longer Life—finances for a longer life, fact sheet,
DSS, Canberra, May 2018.
Australian Government, op. cit., p. 185.
COTA Australia, Federal
Budget 2018 —welcome commitment to better planning for an ageing population and
aged care, media release, 8 May 2018.
DSS, op cit.
Australian Government, op. cit., p. 175.
DSS, ‘Work Bonus’,
DSS website, last updated 14 September 2016.
Parliamentary Budget Office (PBO), ‘‘Costing
outside the caretaker period’, (pension Loans Scheme), PBO, Canberra, 12
Choices for a Longer Life—finances for a longer life, fact sheet,
DSS, Canberra, May 2018.
Department of Social Services (DSS), ‘Pension
Loans Scheme’, DSS website, last updated 29 January 2016.
Department of Human Services (DHS), ‘Pension
Loans Scheme costs and interest rates’, DHS website, last updated 6
Combined Pensioners and Superannuants Association (CPSA), Budget
2018 a fizzer for older Australians, media release, 8 May 2018.
The Australia Institute, Evidence
backing Scott Morrison plan to expand Pension Loan Scheme, media
release, 8 May 2018.
D Dixon, ‘Loan
scheme extension is great news’, The Canberra Times, 13 May 2018.
N Prior and N Bruining, ‘New
loan scheme numbers not so attractive’, The West Australian, 14 May
All online articles accessed May 2018.
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