In session 3 we discussed the Pension Loan Scheme. You can borrow $572 per FN as a single pensioner and $862.60FN as a married couple if you own your residence or an investment property. It is payable fortnightly or can be paid as a lump sum of $14,872 or $22,427.60 for the first year and fortnightly thereafter. You do not have to pay the loan as the loan + interest accumulates until it reaches approximately 50% of the value of your property at which stage your fortnightly payment may stop.
You still do not have to pay back the loan until you die or sell the property.
You can use the loan for any purpose: medical equipment, holiday or just supplement your living costs. The best use of the loan is to buy investments.
You could set up an investment funds for the beneficiaries of your will or for your grand children.
Pension affected under the income test
We have seen that maximising your pension depends on a strategy of converting income to capital gain or invest in a property because of the depreciation allowances. We will have a separate session about the Pension Maximiser Plan (Session 6) which is ideally suited to people affected under the income test
Pension affected under the asset test
There is only one strategy for these pensioners and that is to reduce assets to increase the pension.
You can do this by gifting, a holiday, medical treatment etc but also by using the Pension Loan Scheme.
People assessed under the asset test are probably the poorest people of all. They normally will have one or 2 investment properties which have increased in value over the years and moved them into the asset test.
They lost their pension and the income from the property is normally less than the full pension.
Then there are repairs on the investment properties
They are probably worse off than people on the full pension.
They are asset rich and income poor.
The first thing to do is to sell the investment properties and probably buy a new property to take advantage of the depreciation allowances
I can certainly give information on an individual basis to at least double your income.
In the mean time how about a new $60,000 new car at absolutely no cost to you?
Your aim is to reduce assets and increase your pension
You are in a very strange situation that the government will give you money for nothing.
The Pension Loan Scheme was originally designed for people owning their residence and use the equity in their homes to supplement living cost. You have been struggling all your life working for your home and the home is finally paying you back and is now working for you.
If you borrow money against your residence it does not reduce your assets as Centrelink does not take that loan into account.
If you borrow against your investment property Centrelink takes that as a liability which reduces your assets
For every $1 dollar borrowed, your pension increases by 7.8 cents or 7.8%
You must spend that money in things that will not be regarded as assets.
This could be a holiday, charity, medical, furniture, and a lease
A lease is not regarded as an asset. As long as you pay your lease payments the object is still owned by the lessor.
Any lease will do, but the obvious one is a car. It could also be furniture, solar panels, insulation etc.
Let us take a $60,000 electric car. Your loan pays the lease payments.
So you pay 3.95% ( which you do not have to pay) and get a 7.8% increase in your pension , that is 3.85% or almost 4% for nothing.
If you now invest your extra 7.8% into say shares and add the lease payments after they stop in say 5 years to the investment then that investment returning say 7% using compound interest, exceeds your accumulated loan in 13 years and you have had a $60,000 car for absolutely nothing.
On top of this you have reduced your living costs. Electricity is cheaper than petrol. And if you used the same system for solar panels and insulation you have further reduced cost of electricity and heating.
You have to be careful with the investments as they could be regarded as assets, In that case your loan will still be repaid but it will take 17 years.
Your estate on death is reduced by the loan.
If you make the investments in the name of your beneficiaries they are no longer your assets and do not affect Centrelink. The investments will cancel out the loan.
Rather than investing in bank shares, the best investment would be to use your 7.8% increase in your pension to reduce a non-tax deductible home loan of your children.
Better still if the investment is in the name of your beneficiaries in which case it is not your asset and does not affect Centrelink.
I myself invest in the name of my grandchildren. I will never give money to my children or grandchildren because they will only spend it on expensive cars, holidays smoking or drugs. The funds can only be used as a future deposit on their house purchase.
Self Funded Retirees
You can borrow $1716FN as a single or $2587 as a married couple
Investment in new property is the best option
Further strategies will be discussed in sessions 6,8 and 10,11 and 16