Deeming rates to remain frozen for another year

Article published 20 May 2024

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Budget win: Deeming rates to remain frozen for another year

Pensioners with some savings put aside can breathe a sigh of relief after Tuesday night’s announcement that deeming rates will remain frozen, with the lower rate staying put at 0.25 per cent and the upper rate at 2.25 per cent.

This arrangement was due to end on 1 July 2024, which has had many pensioners waiting anxiously to hear how their pension might be affected.

As deeming rates are typically set close to the Reserve Bank of Australia’s (RBA) cash rate, it was expected that there would be a steep increase, leaving those with some assets worse off. The cash rate is currently 4.35 per cent.

Treasury estimates around 876,000 income support recipients, including 450,000 Age Pensioners, will benefit from the extended rate freeze. Lower deeming rates will also benefit about 136,000 JobSeeker Payment recipients and 96,000 Parenting Payment recipients.

What’s a deeming rate?

The income free area is the amount of income a person receiving the Age Pension can earn each fortnight before losing part (or all) of their pension or payment.

Income includes wages and salaries, as well as interest payments and other money made from investments. However, it’s a bit easier to keep track of money from paid work because it doesn’t jump around as much as some types of income that are more closely tied to the financial market.

Deeming is a set of rules used for income security purposes. If you have savings or investments, instead of working out exactly how much income you have made from these sources, your income is ‘deemed’ to be a set percentage of your overall assets. This percentage typically changes each year but has been frozen since 2022.

So, if you have between $0 and $60,400 (or $100,200 for couples) in assets, your income is deemed to be 0.25 percent of the overall value of those assets. If you have more than that, anything over this threshold is deemed at the higher rate of 2.25 per cent, but the lower rate still applies to the rest.

Deeming is supposed to provide an incentive to invest your savings rather than leaving them sitting in the bank, because any return on investment that you make above the deeming rates will not affect your pension or payment as long as your overall income remains under the income free threshold. If you make 5 per cent interest but the deeming rate is set at 0.25 – 2.25 per cent, well, good for you. As far as Centrelink is concerned, no you didn’t!

However, if you give away money that goes over the permitted gifting limit of $10,000 per year (up to a limit of $30,000 over five years), the amount you have given over that limit will still be deemed as an asset.

And this is the ‘simpler’ system!

What happens next year?

Well, only time will tell. The cash rate is set to drop by mid-2025, meaning it wouldn’t be such a sharp jump if the rate freeze ended. It would be a surprise to see deeming rates frozen for a fourth consecutive year if interest rates continue to drop.

On the other hand, next year is an election year, so it’s anyone’s guess.

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