‘Finances for a longer life’ measures

Budget Review 2018–19 Index

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.[1] 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.[2] 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.[3]

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.[4] 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.[5]

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.[6] Peak body COTA Australia has welcomed these measures as a way to ‘improve the standard of living for older Australians’.[7]

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.[8] The Budget provides $227.4 million over the forward estimates.[9] This measure will require legislation.

How the Pension Work Bonus currently works

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.[10]

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.[11]

Changes to the Pension Work Bonus

This budget measure makes two changes to the Pension Work Bonus:

  • 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 Scheme

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.[12] The Department of Social Services expects around 6,000 people to take up a loan under the revised scheme over the next four years.[13]

This measure is expected to cost $11 million over the forward estimates. It will require changes to legislation.[14]

How the Pension Loans Scheme currently works

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 death.[15]

The Government charges compound interest of 5.25 per cent on the outstanding loan balance.[16]

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.[17]

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’.[18] 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 reverse mortgages.[19]

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 rate.[20]

[1].          Treasury Laws Amendment (2017 Measures No. 1) Regulations 2017.

[2].          Department of Social Services (DSS), Means test rules for lifetime retirement income streams, Position paper, DSS, Canberra, 7 February 2018, p. 9.

[3].          Australian Government, ‘General provisions for assessing income streams’, Guide to social security law, DSS website, 11 May 2015.

[4].          Australian Government, Budget measures: budget paper no. 2: 2018–19, p. 175.

[5].          DSS, More Choices for a Longer Life—finances for a longer life, fact sheet, DSS, Canberra, May 2018.

[6].          Australian Government, op. cit., p. 185.

[7].          COTA Australia, Federal Budget 2018 —welcome commitment to better planning for an ageing population and aged care, media release, 8 May 2018.

[8].          DSS, op cit.

[9].          Australian Government, op. cit., p. 175.

[10].       DSS, ‘Work Bonus’, DSS website, last updated 14 September 2016.

[11].       Ibid.

[12].       Parliamentary Budget Office (PBO), ‘‘Costing outside the caretaker period’, (pension Loans Scheme), PBO, Canberra, 12 October 2015.

[13].       DSS, More Choices for a Longer Life—finances for a longer life, fact sheet, DSS, Canberra, May 2018.

[14].       Ibid.

[15].       Department of Social Services (DSS), ‘Pension Loans Scheme’, DSS website, last updated 29 January 2016.

[16].       Department of Human Services (DHS), ‘Pension Loans Scheme costs and interest rates’, DHS website, last updated 6 February 2018.

[17].       Combined Pensioners and Superannuants Association (CPSA), Budget 2018 a fizzer for older Australians, media release, 8 May 2018.

[18].       The Australia Institute, Evidence backing Scott Morrison plan to expand Pension Loan Scheme, media release, 8 May 2018.

[19].       D Dixon, ‘Loan scheme extension is great news’, The Canberra Times, 13 May 2018.

[20].       N Prior and N Bruining, ‘New loan scheme numbers not so attractive’, The West Australian, 14 May 2018.


All online articles accessed May 2018.

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