Finance Retirement How the changes in deeming rates will affect you

How the changes in deeming rates will affect you

Deeming rates.
Lower deeming rates will help part-pensioners pay the costs of life. Photo: Getty
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Sunday’s move to cut the deeming rates on assets held by part-pensioners will not be the last move by the government and highlights the need to introduce an automatic mechanism to set the rate.

The government pushed deeming rates down to 1 per cent from 1.75 per cent for savings of up to $51,800 for singles and $86,200 for couples.

Above those levels the deeming rate has been cut from 3.25 per cent to 3 per cent.

What that means is that 630,000 people on a part-pension and 350,000 people on other welfare payments – including disability and parenting payments – will get an income boost of up to $1000 a year from September.

That’s because the government will assume their investments will earn less than they assume now, which in turn cuts their notional income and boosts their pension payment.

The move has been made because there have been five interest rate cuts between the last change to deeming in 2015 and the present.

That left the government assuming pensioners were making far more money on investments than they actually were and, consequently, reduced pensioners’ actual incomes.

While the government has cut deeming rates now, they are still higher than some popular investments for pensioners.

Term deposit rates are now around 2 per cent and bank savings accounts pay as little as 0.3 per cent.

That means pensioners are still losing out and deeming rates are well off the halcyon days earlier in the decade when they were lower than actual interest rates.

Pensioners sacrificed for surplus

Opposition spokesman on financial services Stephen Jones told The New Daily that Sunday’s move was “too little too late” and it “doesn’t make much difference for people with small amounts of savings. They have delayed the move as long as possible to protect the surplus”.

The deeming rate cut had been so small that if, as expected, the Reserve Bank of Australia moves to cut the cash rate again later in the year, pensioners will once again be pressured by unrealistic deeming levels.

“If they drop rates again, they will have to move on deeming again,” Mr Jones said.

Ian Yates, CEO of lobby group the Council on the Ageing (COTA) said: “We’re fairly comfortable with the move, but it highlights the need to come up with an objective benchmark to be used to set the rate in the way that it’s done every six months for the age pension.

“At least it would be coming up as an issue every six months,” Mr Yates said.

Most not affected

Mr Yates observed that 75 per cent of age pensioners are not affected by deeming rates because their asset base does not trigger the income or assets tests.

“You can have well over $100,000 in the bank as a single pensioner, or over $200,000 as a couple and the deeming rate doesn’t affect you. Most pensioners don’t even have that level of savings.”

While the cuts were welcome, many people would still have their pensions unfairly cut, said Paul Versteege, policy manager with the Combined Pensioners and Superannuants Association (CPSA).

“The reductions in the deeming rates are obviously going to produce better outcomes for affected pensioners, but over-deeming will still be rife.”

The lower deeming rates will give people the right to an increase in allowable assets under the pension rules.

“Single pensioners can now have $22,000 more in savings before they will be affected by deeming rates. For couples, that’s $38,000,” he said.

“But those with maximum savings under the pension income test will continue to be over-deemed if they have their money in 2 per cent term deposits [when the deeming rate is 3 per cent],” he said.

The table above produced by CPSA demonstrates how lower deeming rates will improve pensioner incomes.

By subtracting the pension-payment reduction under the existing arrangements from Sunday’s changes, the boost to pensioner incomes can be determined.

Mr Versteege said CPSA’s calculations differed marginally from figures the government had announced because details of the government’s calculations had not been released.

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