Could deeming rates eat away at your pension?

Each year, tweaks to the deeming rate formula erode some pension entitlements

How deeming rates affect you

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?

All content on the YourLifeChoices' website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regards to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances. Financial comments provided by readers cannot be relied upon as professional advice, because they are not verified by YourLifeChoices.

Are you eligible for an Age Pension? Do you know your rights? The RetirePlanner™ tool has all the information you need.



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    2nd May 2018
    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?
    Old Geezer
    2nd May 2018
    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.
    2nd May 2018
    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!
    Old Geezer
    2nd May 2018
    Heavens forbid if I even mentioned derivatives trading then.
    2nd May 2018
    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.
    2nd May 2018
    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!
    2nd May 2018
    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?
    Old Geezer
    2nd May 2018
    AMP is starting to look like attractive for the first time since it listed.
    They would probably do OK out of it at these levels.
    2nd May 2018
    Withdraw your savings and put under bed, do it as soon as you can and let them deem nothing.
    Old grey
    2nd May 2018
    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
    Old Geezer
    2nd May 2018
    Yes but they aren't worth much so it's not worth worrying about.
    2nd May 2018
    Best not to overvalue belongings. If you had to sell them immediately they wouldn't be worth much at all.
    2nd May 2018
    You can report adjustment of your assets value every time they depreciates by $2,000. Cars depreciate by 30% pa Furniture by 50% pa and so on.
    2nd May 2018
    This is wrong, they don't deem your furniture or cars, only financial assets.
    Old Man
    2nd May 2018
    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.
    Old Geezer
    2nd May 2018
    They are fair as it's not rocket science to get 3.25%.
    2nd May 2018
    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.
    2nd May 2018
    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.
    3rd May 2018
    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.
    Magic Touch
    2nd May 2018
    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.
    2nd May 2018
    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.
    7th May 2018
    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!

    2nd May 2018
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    Nan Norma
    2nd May 2018
    milagrosriver you've come to he WRONG place.
    3rd May 2018
    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
    3rd May 2018
    If you have your money in a bank it is Guaranteed it is NOT if you have it in an investment.

    The most I can get in a bank is 2.5%
    3rd May 2018
    Your argument doesn't hold water. For example a Pension Couple with $400k in the bank, will be deemed and lose $38/ftn each of their Pensions. $400k in the Bank at 2.5% will return app $385/ftn in interest. What's the issue?
    7th May 2018
    Well I am alone-- I also do not have $400.000 in a bank -- but the deeming rate is STILL 3.5%
    Magic Touch
    3rd May 2018
    Deeming rate it,s like SMSF what you chose to invest with your monies. But age pension money are use to live on our daily life, it,s not some extra monies you can invest. If you loose it how are you going to live on. Not like when you are at the working age which you have your wages coming in. So you lost it you still live on and try some other investment. Super Fund also riskie like the GFC, your 3 years super monies gone just like that the fund manage never had to take responsible for it. If 1/3 OR 1/2 of the monies are invest in gold it will not lost that much. Because every time in the market it work like that when market creash Gold price go up.
    All the time this government only know how to punish the older Australian, they don,t know some pensioner had no supper at all because it,s already use to pay to the bank still not enough to pay off the loan.

    7th May 2018
    While deeming rates SHOULD be equal to bank interest and no higher, I don't really have a major issue with them because they don't effectively reduce income to where you are better off having less. What is really disturbing is that the assets test effectively deems at a whopping 7.8%+ (when you include concessions). It's very hard to get that return without high risk, and given that the pension increases automatically every 6 months, anyone with less than about $1.5 million (for a couple) would be stupid not to buy a house worth $1 million more than their current home, or spend $1 million on cruising, and claim a part pension. Younger Australians should ensure they don't retire with more than $500,000 (for a couple).
    That's TOTALLY IDIOTIC and makes a complete mockery of all claims to be trying to reduce the cost of aged pensions. It screams a focus on persecuting the aged and trying to limit their benefit from working and saving UNLESS they are in the wealthy class. What a disgrace!
    This policy proves conclusively that the government is all about social engineering - NOT budget management.

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