How deeming rates really work: who benefits the most and who benefits the least

Article published 22 July 2019

How deeming rates really work: who benefits the most and who benefits the least

THE deeming rate cuts announced on 14 July 2019 are obviously going to produce better outcomes for affected pensioners, but over-deeming will still be rife.

Cutting the lower rate from 1.75 per cent to 1 per cent and the higher rate from 3.25 per cent to 3 per cent is insufficient for some with savings under the pension income test will continue to be overdeemed if they have their money in 2 per cent term deposits.

For those whose savings are in shares, super or managed funds, the cuts deliver an additional benefit. They were generally achieving more than 3.25 per cent in return, so for them the deeming rate cuts represent a little extra.

The lower deeming rates also means that the pension income free area now absorbs more of interest income.

This is how it works. The information below assumes you have financial assets only and no other income-producing assets.

As a home owner and single pensioner, you are allowed $4,520 in income before it affects your pension. This means that under the old deeming rates, you had to have $163,000 in savings before you were deemed to have made $4,520 in interest. Under the new deeming rates, you need $185,000.

If your savings are less than $163,000 now, you were not affected by deeming rates. Obviously, the new ones can’t touch you either.

As homeowners and a pensioner couple, you are allowed $8,000 in additional income before it affects your pension. To be deemed to be making that amount in interest, you need $285,000 in savings. Under the new rates, you can have up to $323,000 in savings.

The new deeming rates will be effective from 1 July 2019 (backdated), but you’ll need to wait until 20 September 2019 before it shows up in your bank account.

Deeming rates are used in the income test only. This means that as a single home owner you are not affected by deeming rates (old or new) if you have more than $263,250 in savings. At that point, the asset test is applied, which means that deeming rates are irrelevant. For home owning couples, if you have more than $394,500 in savings, the asset test will be used: no deeming rates.

Most people CPSA talks to about deeming rates turn out to be needlessly concerned, because they either do not have enough in savings or too much.

Still, a quarter of pensioners are affected by deeming rates. To them, the Government needs to explain exactly how it hit on 1 per cent and 3 per cent as the right rates. Ten years ago, the average annual term deposit rate was 5.3 per cent and the deeming rates were 2 per cent and 3 per cent.

Try and find the logic in that.

Obviously, deeming rates need to be set independently, which highlights the urgent need for a Social Security Commission to set the rate of all social security payments. Leaving the determination of rates to politicians is unfair to those dependent on those rates.

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