Could deeming rates eat away at your pension?

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Deeming rates may not be a conversation topic to set your dinner guests on fire, but these rates of return the Government assumes for your investments could cost you a full Age Pension.

The rates are an estimate of what returns or interest you may have earned from investments, such as term deposits or shares, regardless of whether you earned more or less. That is, the Government ‘deems’ that you have earned a certain amount.

Those investments include account-based pensions, such as most superannuation funds, and account-based annuities. Once the deeming rate is applied to your nest egg, your pension entitlement may be adjusted downwards.

The purpose of deeming is to encourage social security recipients to invest their money so as to receive the best possible return. The Government wants recipients to maximise their private income by investing it well, rather than allowing its value to decline over time. The theory goes that if welfare recipients allow their investments to erode, then the onus is on Centrelink to potentially increase its payment to the claimant.

In the past 20 years, deeming rates have fallen sharply, reflecting the slide in interest rates. But back in 1996, the rates were set between 5 per cent and 7 per cent.

Currently, if you are single, you are deemed to have earned 1.75 per cent on investments of less than $50,200. Any investments valued above that are assumed to have earned 3.25 per cent.

If you are a couple and one or both of you receive benefits, you are deemed to have earned 1.75 per cent on a balance of less than $83,400. Any balance above that is assumed to have earned 3.25 per cent.

These are the rates that apply to people receiving income support from 1 January 2015. They are subject to change after 30 June 2018, in line with adjustments to the value of the above thresholds. Thresholds are indexed each 1 July, although the rates do not automatically change.

Recipients who were collecting the Age Pension before 1 January 2015 have their investments treated in a more complex fashion. To begin with, their superannuation pensions are not subjected to deeming provisions. Instead, a calculation identifies an asset test-exempt amount and this is deducted from the income support they receive.

Under rare circumstances, exemptions to the deeming rules can be granted, for instance, when a financial investment has failed catastrophically, or for some superannuation investments where the funds are fully preserved or cannot be accessed.

However, if you choose poor-performing investments, you are not exempted. If, for example, a share portfolio returns negative results, you will still have the deeming rates applied to the value of your total investment. Likewise, if funds or companies are facing short-term difficulties, and your investment suffers, you will not be exempt.

Do you think it is fair for the Government to assume that pensioners may earn more interest than they actually do?

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Written by Olga Galacho


Total Comments: 30
  1. 0

    Of course it is not fair! Just another way of taxing retirees further. Surely it is time the greedy banks were made to pay higher interest on savings than they do now.
    It is either the government or the banks that rob you blind?

  2. 0

    Deeming is based on a mix of investments not just money in the bank. If you can’t earn more than the deeming rate let’s face it you are poorly invested.

    • 0

      Old Geezer, you are advocating against a one size fits all scenario. There are many, many, people who are not financially literate (not their fault), and for them a term deposit, or pass book account is the safest option. For them, investing in shares is like going to Randwick or Flemington on a Saturday, very little difference. Try and be a little more understanding – we all cant be as smart as you!

    • 0

      Heavens forbid if I even mentioned derivatives trading then.

    • 0

      Big Al
      Unfortunately there are people on this earth that have no capacity to see things except through their own eyes and thinking, its not that they have bad feelings for anyone , it is simply that they actually do not, never have been able to, and will always have a mind set that says, “surely everyone sees this like me , I am right” and of course we all know the times when we think we are right, and sometimes we are simply wrong or off target.
      Well there are some , who never see that, a minority I’d say , but some don’t ever see the other persons situation at all, they look through self coloured glasses.
      Its sad but true, and some find no compassion because they think of those with a different aspect, or those with lack of information, to be lesser.
      Whether Geezer is one of these or just a mischief maker I don’t know, but he certainly sounds like a smartie sometimes who can’t really see. Maybe he’s a plant to get some commentas going.
      Don’t think so though.

    • 0

      A lot of people forget or ignore the fact that the first $4,368 of income is deducted from the deeming rate calculations which results in the actual average rate being lower than on the stated 1.75% and 3.25% for purpose of the Deeming Income calculation.
      One can have a bit over $150,000 in a savings /investment account before the full age pension is reduced for a single age pensioner.
      If your investments earn more than the average Income Deeming rate would one complain?
      Do your sums people before you whinge!

  3. 0

    They know people will not earn 3.25% at the banks, which have in most cases withdrawn their deeming accounts. So they are encouraging people, who may have never invested in their lives, to suddenly become punters in the share market. This will lead to a certain number losing a fortune (imagine if you had just invested in AMP) and many others being charged obscene fees by investment consultants.

    What’s next – the government will deem what’s wrong with us and send us pills so we don’t need to bother the doctor?

  4. 0

    Withdraw your savings and put under bed, do it as soon as you can and let them deem nothing.

  5. 0

    Deeming rates are also applied to all other assets, so if your car/s, furniture etc are not earning you that rate, then you are behind the eight ball already

  6. 0

    Deeming is unfair. It was brought in by Keating in 1991and expanded by Costello in later years. The theory seems to be that people should always get interest or returns on their money and if they don’t want to then government will penalise them by assuming that they should. In saying that, until the GFC deeming rates were always less than the average person could achieve from financial institutions. There should be a lowering of deeming rates now if not a complete cancelled.

    • 0

      They are fair as it’s not rocket science to get 3.25%.

    • 0

      I’m with you Old Man. I was scared into investing when Keating said: “The purpose of deeming is to encourage social security recipients to invest their money so as to receive the best possible return”. Newspapers took up the story warning anyone approaching retirement to see a Finacial Advisor.
      Consequently, I lost at least 80% of my savings after following the investing advice of a Financial Adviser. I had planned to have sufficient savings to last until I was 72 yo. Within months we had the big downturn in the economy, and at age 65 I needed the Age Pension.

    • Profile Photo

      I lost 35% of the market value of a house I owned thanks to Keating’s lack of financial knowledge. His deregulation and attack on unions is still causing angst. Making policy based on current returns with no acknowledgement of history was one of Keating’s failures in my opinion.

      Other OECD countries can treat the aged properly. Australia has dropped the ball on this.

    • Profile Photo

      The GFC changed everything. Nobody saw negative rates coming.

      How will Centrelink deal with negative rates if we get them here I wonder.

      Keating and Costello made the mistake of expecting the future to be like the present.

  7. 0

    Priscilla you are 100% right. When the government put the 0.2 or 0.5% on the big 4banks plus 1 more bank the banks had increase the virable rate on the loan repayment. So the retirees will had to put up with it. This government had make centrelink to cut off the part payment to the retirees due to the investment properties prices go up which make the council rates go up and centrelink use the council rate to assest so their part payment was total cut off. Now they only had one meal and 2 tea a day.
    Pension payment is not walfare they work so hard during their working time and when they retired they should entitle to had it, not come up with all source of way to stop payment. As a government there are many way to get monies can,t you stop comming on the older Australian.

  8. 0

    Not sure of the motive behind this article. People should in the main be able to achieve income in excess of the deeming rates. I consider deeming rates to be one of the more equitable approaches to determining one’s income. If you are not achieving income greater than deeming rates I suggest you require a new approach to managing your investment.

    • 0

      Chef, if you are not achieving income greater than deeming rates, there is probably a very good explanation that points to having suffered disadvantage or crisis. Most who don’t earn more than deeming rates never had the benefit of much education. I mix with many who grew up abused and deprived in institutions and suffered a lifetime of gross injustice. They see the system as the enemy and always ”out to get them” in some way, so they are terrified of any kind of investment. What you are saying is that these people should suffer further disadvantage and hurt, rather than being treated with compassion in their later years. Sorry, I think that’s disgusting. These people are morally entitled to far more assistance – NOT LESS!

  9. 0

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  10. 0

    I have been complaining about these high deeming rates for years now and have written to the minister — but never got a reply — it is absurd that you are being deemed to be getting far more than you can get at a bank

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