Deeming rates

Will the Federal Government decide to lift the deeming rates inferred on assets held by those receiving the aged pension, in this month’s Federal Budget or later in the year?

In calculating how much each older Australian receives by way of the Federal Government’s aged pension, Centrelink combines all the assessable assets you hold outside of your own home and then calculates the total.

It then infers or ‘deems’ that these assets are generating a minimum amount of income and this level of income is taken into account, when calculating each person or couples’ minimum income levels. This in turn, impacts on how much pension they can receive each fortnight.

If your investments are generating the amount determined under the deeming rules, it means you are missing out on income that you should be receiving and so you should take another look at how you invest these funds.

The deeming regulations were put in place so older Australians wouldn’t just leave funds in low interest earning bank accounts as a means of boosting their entitlements under the age pension provisions.

At the moment, the deeming rate is frozen. The last Federal Government set the rate for singles at 0.25 per cent for the first $56,400 and 2.25 per cent for amounts above this level.

For couples the threshold is $93,600 (combined), which is deemed to earn the lower deeming rate of 0.25 per cent % and amounts above this level are deemed to be earning 2.25 per cent.

These rates were set when the cash rate was just 2.25 per cent.  However, recent interest rate increases mean the cash rate is a full percentage point higher at 3.6 per cent and likely to continue to climb.

What does this mean for anyone receiving the age pension?

Analysts have suggested that if the government matched just five interest rate hikes of the past few years, a single non-home-owning pensioner could be more than $3,000 worse off, while couple non-home-owning pensioners would see up to $1,850 less in terms of lost pension entitlements.

So it is something to be aware of.

There has been a push for the deeming rate to be linked directly to interest rates but this is unlikely. Again, analysts estimate that each quarter of a percentage increase in the deeming rate would save the Government about $200 million a year.

So it is hard to imagine the Federal Government will not look at doing something to bolster the deeming rates from their current low levels but exactly what they will do is uncertain.

What does this mean for those receiving an aged pension? It means that if the Government does move to increase the deeming rate from its current low-level, pensioners will be well advised to make sure that their assets are invested in such a way that they generate more income than the rate deemed.

Otherwise, Centrelink will be assuming that they are earning more income form their assets then they really are, and they will potentially be needlessly penalized by Centrelink and have their pensions reduced.

While this is an area the Government has insisted they have no intention of acting on, given the tight nature of the upcoming budget it is difficult to imagine the Federal Treasurer won’t do something to bring the deeming rate more in line with prevailing interest rates.