Pension deeming thresholds changing, but what about deeming rates?
Good news. From 1 July, threshold indexation could mean a higher pension, but uncertainty about deeming rates could unravel this gain.
No matter how much your financial investments earn, Centrelink assumes they earn a set rate to estimate how much pension you might get.
It’s called “deeming” and the government says it is a simple way to smooth out market fluctuations.
This matters to older Australians because it plays a key role in determining Age Pension entitlements under the income test.
Deeming rate estimator
National Seniors has created an estimator which shows the worst-case scenario if deeming rates go back to the pre-freeze method and are advocating to the Federal Government to delay resetting the rate until interest rates come down to reduce impacts on pensioners.
You can check out our estimator and sign up to our deeming rate campaign here. With your help, we can make a difference.
Instead of calculating your actual returns, Centrelink assumes your total financial assets such as bank accounts and investments are earning a set minimum rate, despite what those assets are actually earning.
The estimate is added to your other income, and the pension income test is applied to work out your payment amount.
Deeming rates have been frozen for two years, which has been good news for pensioners, saving them billions of dollars as interest rates climbed and living costs skyrocketed.
While the Federal Government has signalled that the freeze will eventually end, we do not currently know when and how they will be reset.
Our advocacy on your behalf is explained later in this article.
The Federal Government applies a complicated formula to determine how deeming rates apply to financial assets, which involves applying two different rates to estimate the income your financial assets would generate.
This requires the setting of a deeming threshold, which is subject to change annually via indexation, to keep pace with inflation; and the setting of deeming rates which apply to your assets.
From 1 July, the deeming threshold for a single pensioner lifts from $62,600 to $64,200. That means financial assets up $64,200 will be deemed to earn 0.25% income and financial assets above this will be deemed at 2.25%.
For couples the deeming threshold increases from $103,800 to $106,200. That means financial assets up to $106,200 will be deemed to earn 0.25% and financial assets above this will be deemed at 2.25%.
The 1 July changes to the thresholds will mean more of your financial assets are assessed according to the lower rate, which is good news for pensioners as it will lower your deemed income, meaning you may get a higher pension payment, if you are subject to the income test.
Which financial assets are deemed?
These include ASX shares, international shares, bonds, cash at the bank, and some superannuation income streams.
Some financial assets, like investment properties, are not subject to deeming rules. Instead, you simply report the net rental income.
According to the Department of Human Services, by treating all financial investments the same, deeming rules:
Encourage people to choose investments on their merit rather than on the effect the investment income may have on the person's pension entitlement
Provide an incentive to invest in higher return investments, as any interest rate achieved above the deeming rates doesn’t count as income
Create a simple way to assess income from financial assets, increasing predictability and reducing fluctuation in payments.
The million, or billion, dollar question is: what will the Federal Government do with deeming rates when the freeze lifts after 1 July?
National Seniors Australia (NSA) believes the current freeze on deeming rates should continue while interest rates remain high.
Importantly, we believe the government’s approach to setting deeming rates needs urgent reform, as it is neither fair nor transparent.
It should be linked to changes in the Reserve Bank of Australia cash rate to reflect the returns available via term deposits.
A consistent and transparent method for determining deeming rates will ensure Australians know the pension system is fair and adequate.
NSA has created an estimator, which shows the worst case scenario if deeming rates go back to the pre-freeze method, and are advocating to the Federal Government to delay resetting the rate until interest rates come down to reduce impacts on pensioners.
You can check out our estimator and sign up to our deeming rate campaign here. With your help, we can make a difference.
