Deeming rate freeze is coming to an end. What steps should you be taking?

A couple going over their finances

Age pensioners need to prepare for when a major COVID financial concession expires this year.

Centrelink’s deeming rate freeze comes to an end on 1 July and while experts are predicting an initial ‘modest’ rise, pensioners can expect the rate to continue to increase.

In July 2022, the Australian government announced it would freeze social security deeming rates for two years to help pensioners ‘keep more in their pockets’. 

The move covered about 445,000 age pensioners and froze the lower deeming rate at 0.25 per cent and the upper rate at 2.25 per cent.

The lower deeming rate applied to financial investments up to the threshold amounts of $60,400 for singles and $100,200 for couples. The upper deeming rate applies to financial assets above those thresholds.

Income without penalty

Pensioners with income generated from interest-bearing financial products had a ‘win’ with this move as interest rates have risen over the past couple of years, but the deeming rate freeze means their income has increased without penalty.

The interest rate was 0.35 per cent when the deeming rates were frozen. The cash rate is now about 4.35 per cent.

Deeming usually covers bank accounts, cash, bullion, shares, managed funds, superannuation, account-based pension funds and financial gifts.

Retirement Essentials suggests the first rise will be designed to ease into any changes.

“The first increase is likely to be modest, to give those on government benefits time to take stock of their assets and associated income and make any changes they feel are appropriate,” a report states.

Time to take stock

Retirement Essentials recommends people affected by this change should begin to take stock of their investments.

“External changes are just that – you can’t influence them, and so need to consider, instead, what you might do in response,” the report says.

“Understanding, in the first instance, the percentage return on each of your different asset classes is important. You will then know what you are actually earning.

“You may then wish to change the mix of investments if there is a better way overall of apportioning your savings.”

Retirement expert Nick Bruining suggests one option may be to make use of Centrelink-complying income streams that benefit from the current high interest rates. 

“Typically sold as a lifetime annuity, these products combine guaranteed indexed income payments for life with generous Centrelink concessions,” he says.

“Financial planners typically combine these products with conventional income-paying investments like account-based pensions to provide a blend of certainty and flexibility in structuring retirement portfolios.

“Irrespective of the investment returns, only 60 per cent of the payments actually received count towards the income test.

“Only 60 per cent of the invested amount is included in the Centrelink asset test. Once the person reaches 84 years of age, that drops to just 30 per cent.”

What are deeming rates?

As a quick explainer, deeming rates are a set of rules used to calculate your income from financial assets. They assume those assets earn a set rate of income, no matter what they really earn. This income is included in the income test.

As the rate is steady – apart from periodic indexation – it keeps any Centrelink payments steady.

It also provides an incentive to invest as any interest rate achieved above the deeming rate doesn’t count as income.

Will repealing the freeze affect you? Will you have to rethink your financial choices? Why not share your thoughts in the comments section below?

Also read: How to keep your myGov account safe

Written by Jan Fisher

Accomplished journalist, feature writer and sub-editor with impressive knowledge of the retirement landscape, including retirement income, issues that affect Australians planning and living in retirement, and answering YLC members' Age Pension and Centrelink questions. She has also developed a passion for travel and lifestyle writing and is fast becoming a supermarket savings 'guru'.

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