Older Australians with financial investments had a Budget win and a bit more security with the announcement that deeming rates would be frozen for the next 12 months.
The rates will stay set at 0.25 per cent for the lower rate and 2.25 for the upper rate until July 2025, in a move that should add confidence for those with a financial nest egg.
Treasury estimates around 876,000 income support recipients, including 450,000 age pensioners, will benefit from the extended rate freeze.
However, while the decision is reassuring, what does it actually mean? The government throws around a lot of terms and words, but for those entering retirement or navigating the retirement system, an overview may be overdue.
Here’s our guide.
What does deeming mean?
The term is used to cover an assumed amount your financial investments earn, not what they actually earn. The government ‘deems’ a set amount that your assets have earned. So instead of constantly reporting any changes in your investment income, it’s set at a steady rate. It’s easier for you and it means the government doesn’t have to check every claim.
Any income earned above the deemed amount is out of bounds for Centrelink purposes, which is designed as an incentive to shop around for your best returns.
The rates are:
- For singles, the first $60,400 of your financial assets has the deemed rate of 0.25 per cent applied. Anything over $60,400 is deemed to earn 2.25 per cent.
- For couples with at least one spouse on the Age Pension the first $100,200 of your combined financial assets has the deemed rate of 0.25 per cent applied. Anything over $100,200 is deemed to earn 2.25 per cent.
- For a couple not on the Age Pension, the first $50,100 of each of your own and your share of joint financial assets has a deemed income of 0.25 per cent per year. Anything over $50,100 is deemed to earn 2.25 per cent.
This is important, because your Age Pension eligibility is based on two financial tests, the income test and the assets test.
The assets test values almost all of your assets including furniture, vehicles, the value of investment properties, and investments. Your principal residence is excluded.
The income test values all the income you earn from all sources including salary, dividends, and interest from investments. The deeming rate is applied to the income from your financial investments.
You must be under the thresholds of these two tests to qualify for the Age Pension. However, you may be eligible for a part pension if you are close to these thresholds. Check out Noel Whittaker’s pension calculator here to see if you qualify.
If you are wondering why deeming rates may still apply for people not on the Age Pension, that’s because eligibility for the Commonwealth Seniors Health Card (CSHC) relies on the income test. The CSHC qualifies people of Age Pension age who are not on the Age Pension to cheaper health services and some discounts depending on which state you live in.
Why the deeming rates were frozen
During the pandemic, the then government was concerned that in such uncertain economic times, older Australians needed more security around their financial situations so froze the rates from May 2020 to June 2022.
The rates were frozen again in 2022, with the government announcing the move would help pensioners “keep more in their pocket”.
The government previously would change the deeming rate to closer match the Reserve Bank of Australia’s (RBA) cash rate, which was at a historically steady low rate. As you have probably noticed, that rate has been on a near-constant rise, and there have been 13 interest rate rises since 2022. It is currently sitting at 4.35 per cent.
Pensioners with income generated from interest-bearing financial products had a ‘win’ with this move as interest rates have risen over the past couple of years, but the deeming rate freeze means their income may have increased without penalty.
What you should do
With at least one more year of steady deeming rates, if you have been on the border of being eligible for the Age Pension or on a part payment, it may be time to reassess your investments to maximise the amount you can earn and still qualify for payments.
Unless you have a high level of financial knowledge it may pay to consult a financial adviser who specialises in retirement planning.
Otherwise you can contact Centrelink’s Financial Information Service, which may be able to help guide you. Please note, this service only provides information to help you make informed decisions but cannot recommend investment decisions or products. You can access this service here.
Does the deeming rate apply to you? Do you have a strategy to maximise your income under the deeming rate? Why not share your experience in the comments section below?
Also read: Which retirement expenses can you reduce?
The deeming rates are a load of rubbish. I have checked out what I get in exchange rate for my partial English pension, and I have never received what they assess that I do get.