More than one in six Australians are aged 65 years or over, with the majority of the cohort receiving at least a partial age pension - according to the latest ABS and DSS data. This leaves the finances of many older Australians at the mercy of government-set deeming rates, which influence how much pension someone is eligible to receive.
Despite this, many of us probably don't quite know what deeming rates are or how they work. If that sounds like you, or you're simply looking for more info, let's redeem ourselves and unpack this integral financial pillar.
Looking for a new term deposit? The table below displays some of the highest term deposit interest rates available for a 6-month term.
Deeming rates frozen until 2024
Every now and again, deeming rates make headlines. And it's no wonder why. They're an important consideration for many Aussies receiving one of a myriad of government pensions, including the age pension.
Back in 2019, the Federal Government announced it would reduce deeming rates for the first time in four years, dropping the lowest rate by 75 basis points to 1%. It claimed the change would see single age pensioners receive up to $804 in extra pension payments per year, while couples could receive up to $1,053 more.
Deeming rates were slashed again in 2020 as part of pandemic-era stimulus. They were dropped another 75 basis points that year and remain at 0.25% (at their lowest) today.
Those relying on record low deeming rates can relax for a few more years. In the lead up to the 2022 federal election, both major parties promised to freeze deeming rates. And that's exactly what was done. Deeming rates will remain at their current level until 30 June 2024.
"This is another shield to help protect Australians from the cost of living pressures people could feel from an increase in interest rates,” then-Prime Minister Scott Morrison said on announcing the freeze. Though, his party lost power just weeks later.
What is ‘deeming’?
Deeming is a set of rules that government groups will use to estimate your income from financial assets.
It assumes these assets earn money, regardless of whether they actually do or not.
Who does deeming impact?
Deeming applies to anyone receiving government payments and benefits, such as the:
- Service pension: Granted to veterans on the grounds of age or invalidity, their eligible partners, and widows and widowers
- Veteran payment: Interim financial support to veterans who have lodged a claim for a mental health condition and are incapable of working more than eight hours per week
- Income support supplement: A regular income for war widow(er)'s with limited means or a wholly dependent partner
- Age pension: Income support for Australians 66 years and older
- Commonwealth Seniors Health Card (CSHC): For those not receiving any of the above, and are either a veteran, widow(er), or above 60 years of age, the CSHC card entitles the holder to concessions in the health sector
What are financial assets?
Under deeming, the financial assets assessed include:
- bank accounts and term deposits
- managed investments, loans, and debentures
- listed shares and securities
- new account-based income streams (such as a pension)
- money in a super fund that is in the accumulation stage and not paying you a pension
That's not an exhaustive list by the way – we've kept it short in an attempt to stop you from falling asleep or moving on to more exciting financial topics like collateralised mortgage obligations. But keep in mind that things like vehicles, real estate investments, and antiques aren't counted as financial assets.
How does deeming work?
Essentially deeming is a system used by the government to assess how much money you're entitled to receive through your pension. It's a tool that's supposed to account for the entire scope of your wealth and potential income, rather than just how much money you have in savings. For example, if you had money in shares, term deposits, and your savings account, deeming makes a broad assumption of what that financial portfolio generates in income (dividends, franking credits, interest etc.).
Now let's introduce the actual deeming rates themselves. There are not one, but two deeming rates: the higher deeming rate and the lower deeming rate. There are also different rules for singles and couples, so as not to discriminate against you silver-haired bachelors and bachelorettes. We'll explore how the rate is set and the intricacies behind it a little later on.
The lower deeming rate applies to the portion of a person's portfolio up to the government-specified deeming threshold, while any value above this threshold is deemed to earn the higher deeming rate. According to the government, the purpose of this is to provide an incentive for pensioners to invest and earn more of a return than the deeming rates will provide.
As of July 2023, the thresholds for people receiving a pension are:
- For singles: $60,400
- For couples: $100,200 (combined)
Assets up to these amounts are deemed to earn the lower deeming rate of 0.25% p.a., while amounts above are deemed to earn the higher deeming rate of 2.25% p.a.
To get the full pension, a single pensioner can have an "income" of up to $5,304 per year, or $204 per fortnight, before their pension starts to get reduced. For every fortnightly dollar over $204, their pension will be reduced by 50 cents per fortnight. If a single pensioner is deemed to earn $60,632 or more a year ($2,332 per fortnight), they are ineligible for any pension.
Case Study: Doris
Let’s use Doris as an example to break things down further. She’s a single 74-year-old who loves a Cab Sav and Hugh Jackman.
Doris's financial assets come to a total of $75,000
- The first step is to calculate her deemed income up to the deeming threshold of $60,400, using the lower deeming rate (0.25%): $60,400 x 0.0025 = $151
- The second step is finding out how much money Doris has over the threshold, by subtracting the deeming threshold from her total financial assets: $75,000 - $60,400 = $14,600
- The third step is calculating her deemed income on this amount over the threshold, using the higher deeming rate (2.25%): $14,600 x 0.0225 = $328.50
- The fourth step is adding both the deemed incomes, which will give us Doris' annual deemed income: $151 + $328.50 = $479.50
Doris's annual deemed income is $479.50, which is well below the full pension annual income threshold of $5,304 and would allow her to collect the full pension amount without reduction.
Case study: Boris
Now let’s look at an example of someone called Boris whose pension may be reduced by having a deemed income above the full pension threshold. Boris is a single 69-year-old who loves blue cheese and Barbra Streisand.
Boris's total financial assets come to $500,000
- Like Doris, his deemed income on the first $60,400 of his wealth is $151
- His wealth above this threshold is $500,000 - $60,400 = $439,600
- His deemed income on this amount is $439,600 x 0.0225 = $9,891
- His total annual deemed income is $151 + $9,891 = $9,907. This is approximately $381 per fortnight.
- His fortnightly income is around $177 above the full pension threshold. Single pensioners see their pension reduced by 50 cents for every fortnightly dollar above the threshold, so his pension will be reduced by $352.50 x 0.50 = $88.50 per fortnight
Boris's deemed income is $9,907 per year, or $381 per fortnight. He will earn a part pension which is $88.50 per fortnight less than the full pension.
Savings.com.au's two cents
Deeming rates were devised as a way to incentivise pensioners to seek bigger returns for their wealth because some were trying to maximise their pension by minimising their actual income. By earning a higher rate of income than the maximum deeming rate, you can essentially earn bonus income that isn't assessed in the income test for the age pension.
With today's record low deeming rates and decade-high cash rate, some people might find it worthwhile to consider stashing cash in a bank offering senior savings accounts or term deposits that pay more than 2.25% p.a. in interest.
If you're willing to take on a higher degree of risk, you may also be able to earn a higher income yield by investing in other asset classes, such as shares, bonds or property. Investment funds such as ETFs (exchange-traded funds) can be an easy low-cost way of gaining exposure to a diversified portfolio of such assets.
Investing can generate an annual dividend at a rate that is higher than what could ordinarily be earned in a savings account or term deposit. Not to mention, there's a potential for long-term capital gains. Consider consulting a qualified financial adviser to discuss your options.
This article was first published by Alex Brewster on February 22, 2021. Updated by Brooke Cooper on July 24, 2023.
Photo by Raj Eiamworakul on Unsplash
William Jolly
