Age Pension Deeming Rates – UNFAIR RULES

Age Pension Deeming Rates – UNFAIR RULES

In this very low cash rate environment, I find current deeming rates a real deception and a little bit of a sham.

Why – you asking? I will answer that question in a minute for you, but first we need to fully understand:

• What is deeming?
• Why government use deeming rules?
• Which of your assets are affected by deeming?
• Who is mostly affected?
• What are deeming rates?

As you are most likely aware, based on details you provide, Centrelink will apply Income Test and Assets Test to all your assets. Whichever of those two tests provides a lower Age Pension payment outcome, this is what you will get.

So it only makes sense to know in advance which test is the one you need to improve.

What is deeming?

Simply explained, it is a unified way how the government calculates income you are expected to earn from your financial assets.  Deeming is part of Income Test when applying or receiving a pension from DSS (Department of Social Services) or DVA (Department of Veterans Affairs)

Why does the Australian government use deeming?

Apparently, those are the following benefits you get out of deeming rules:

• It is simple and fair way to assess income from financial investments,
• it assesses the same level of income, regardless of the type of financial assets you chose,
• therefore, income support payments do not vary, just because you hold a different asset,
• the deeming rate reflects returns that pensioners can get for their savings.

By treating all financial investments in the same way, the deeming rules:

• encourage you to choose investments on their merit and not on the effect it might have on your pension entitlement,
• help to simplify investment choices,
• deeming encourages you to consider earning better returns on your investments.

Please remember the last 4 points listed above, as this will be our discussion in this article.

What assets are affected by deeming?

Virtually total balance of all your financial assets such as:

• all types of bank accounts, savings account, and term deposits,
• cash in hand in excess of $500 (did you know that?),
• gold and other bullion – so if you have bitcoin or other form of cryptocurrency, it is also included,
• managed funds, insurance bonds,
• loans you make to other people, family, friends or institutions, family trusts, private companies,
• bonds, debentures,
• shares,
• some super funds,
• some pension funds,
• some lifetime income streams,
• gifts in excess of allowable limits – if you don’t know limits – read “Age Pension Asset Test – the truth revealed”.

This is not an exhaustive list, but it gives you a good indication of what is considered a financial asset to earn a deemed income.

Also, I’ve just listed: “some supers, some pensions, some lifetime income streams” – therefore it can tell you that rules can vary between different types of assets. This is due to ongoing changes in the landscape of retirement income streams in Australia.

This might be confusing or even frustrating, but this is exactly how professionals specialising in Retirement Planning like myself, can assist to improve you retirement income position that could include boost of your Age Pension entitlement as well.

What are non-financial assets?

• Entry contribution to a retirement village,
• Your home contents and personal effects,
• car, boats, caravans,
• collectibles,
• life insurance policy that cannot be cashed out,
• private company shares,
• fully or partially asset-exempt income streams – those are under specific rules,
• real estate: vacant land, holiday house, farms.

When listing those assets, I will almost always get the question:

Is a rental property is subject to deeming?

Rental property is treated as your financial asset, but it is not subject to deeming. It has its own way of calculating income, which I will explain in a future article dedicated fully to Income Test.

Who is mostly affected?

Pensioners that receive a part Age Pension that has been reduced under Income Test due to deeming:

• single homeowner with assets between $253K – $270K
• single non-homeowner with assets between $253K – $521K
• Couple non-homeowners with assets between $443K – $645

What are current deeming rates?

Today’s deeming rates (May 2021)

• If you are single – the first $53,000 is deemed at 0.25%, balance above 2.25%
• If you are couple – the first $88,000 is deemed at 0.25%, balance above 2.25%

The big story that the government is telling you is that if you earn more that the deemed income rate, the extra doesn’t count as your income.

So now that we know everything about deeming, let’s go back to my original statement:

Why do I think that current deeming rates are deception and little bit of a sham?

• Originally when deeming was introduced, every bank that provided a Deeming Account or Pensioner Account was supposed to match deeming rates – this is not happening any longer,
• Current cash rates in Australia are lower that deeming rates, hence pensioners are being penalised for market conditions,
• If you as a pensioner keep money in cash, you are penalised twice:

1. on a close-to-no return from the bank, therefore no income earned and,
2. on applying higher deeming rates, therefore deeming an income you are unable to get, but still reducing your Age Pension.

• In order to earn any income, pensioners, as well as self-funded retirees have no choice, but to take a greater investment risk, by investing into shares, managed funds that should provide a higher income than estimated deemed income This is not being recognised by the government and all the risk, all the hard choices are responsibilities of retirees. I find it unfair.
• Risk averse retirees have an extremely hard choice:

1. keep money in safe investments such as cash and fixed interest, and suffer the consequences of low to no income earned – which often means spending your own capital or
2. accept the investment risk, deal with market volatility and hope for the best.

This is exactly when this specialised advice is paramount, to find the optimum solution between:

• your need for income,
• asset security,
• growth of your capital,
• reduction of volatility and
• longevity of income as well as your capital.

Here it is, my heartfelt statement as to how I feel about government’s decision about deeming rates.

If you agree with me and want to improve your investing outcomes, this eBook will help: 12 Principles of Investing – so feel free to get it and start investing the right way.

If on the other hand you find this Retirement Planning topic confusing, but you want to find the best solution for your money – just contact me directly. 

By: Katherine Isbrandt CFP®
Money Strategist & Retirement Planner
Principal of About Retirement

Here is the article you might be interested in:

• What is included in the Age Pension Assets Test?
• Age Pension Explained