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