Calls for deeming rate cuts to offset burden on retirees

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Self-funded retirees are being asked by Reserve Bank governor Dr Philip Lowe to bear a heavy burden for the collective good, with his announcement on Tuesday of the decision to cut the official cash rate to just 0.1 per cent.

Outraged retiree groups are calling for measures, including a cut to deeming rates, to support retirees most affected by the latest interest rate cut.

President of the Association of Independent Retirees Wayne Strandquist said the RBA’s interest rate decision was a “kick in the guts” for retirees and increased the financial pain being felt by fully and partly self-funded retirees.

“Fixed interest investment forms a substantial part of a retiree’s superannuation and private savings, particularly in the latter years of retirement,” said Mr Strandquist.

“The Reserve Bank cash rate reduction will put more downward pressure on term deposit rates with cash held in bank accounts paying almost zero interest.

“The reduction in fixed interest by the RBA continues a trend that has seen term deposit rates fall to historic lows, to a fraction of what they were when many retirees left the workforce.”

Mr Strandquist said when bank account fees were taken into account, many retirees were effectively paying the bank to hold their retirement savings.

“This negative return will further lower the living standards of retirees and require larger drawdowns from their retirement savings until they are forced to rely on the Age Pension,” he said.

The association is calling on the government to reduce the deeming rates for the income test for the Age Pension to reflect the latest dramatic cut to interest rates.

“The 2.25 per cent government deeming rate is over three times the interest rate that can be actually earned today by retirees on a two-year term deposit with the major banks,” Mr Strandquist said.

“To earn returns that exceed the upper deeming rate, retirees are forced to consider riskier investments including a volatile share market.”

YourLifeChoices contacted the Department of Social Services to ask whether a cut to deeming rates is being considered in light of the latest interest rate cuts, but did not receive a reply prior to publication.

Rice Warner executive director Michael Rice told The Australian that interest rate cuts have “smashed” self-funded retirees in recent years.

He explained that eight years ago a three-year term deposit earned 7 per cent, which meant it was possible to earn an additional $14,000 a year from deposits and still receive the full Age Pension. With current interest rates it was only possible to earn an extra $2000.

Mr Rice explained that while fully self-funded retirees with around $800900,000 in savings with most of those assets in superannuation might be okay, those with around $400,000 or less “are the ones that suffer”.

“What happens in practice is they spend their money quicker and run out of money long before they die,” Mr Rice said.

National Seniors Australia chief advocate Ian Henschke told The Australian that the vast majority of older Australians keep most of their money in the bank and the latest interest rate decision could lead to more retirees living in poverty.

“The problem is older Australians can’t go back into the workforce, so they are totally reliant on income from their savings,” Mr Henschke said.

“We know the pension is not sufficient to live on because one in four pensioners live in poverty.”

How will the Reserve Bank’s interest rate decision affect your retirement? Do you believe deeming rates should be lowered to reflect the latest interest rate cut? Would that improve your financial situation?

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Written by Ben

44 Comments

Total Comments: 44
  1. 0
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    Asset test will get SFR before the deeming will, this is a beat up at best.

  2. 0
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    A couple now needs about $4 million just to earn what the age pensions pays if you have nothing. Unless you have $4 million more you are struggling.

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      BS, not many people have $4million and they aren’t struggling. This is about deeming rates for the Pension anyway, which people tend to focus too much on and do not understand how the Pension works.

    • 0
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      I understand what you are getting at, but realistically, if someone has $1,000,000.00 then it would be deemed to earn around $21,464.00, but should be earning at least 4%, i.e $40,000 pa, $15,000 more than aged pension). Unless it is sitting in a bank account, earning just $8000.00.

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      I don’t think you do understand, in your example deeming doesn’t come in to it as the Asset test would disqualify any Pension.

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      and it’s not about living off the income generated by $4 million, it is about spending down and living off the $4 million and any investment earnings from the balance. Spend $100,000 a year and it would last you 40 years so long as you earn CPI
      .

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      The issue isn’t people with $4 million. It’s people with $400,000. They are copping an effective ‘deeming rate’ of 7.5%+++ due to the cruel assets test, getting no pension at all, yet unable to generate more than a tiny income. Sure, they can spend their savings, but some of them sacrificed a lot to put that money aside for known future needs. Now they are forced to surrender it to the taxpayer and enjoy $0 benefit – only punishment and loss – for their efforts. That is where the system is flawed, and this needs to be addressed BEFORE deeming rates are fussed over.

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      Youngagain, you need to clarify why some one with $400k isn’t getting any Pension at all, I agree however that deeming isn’t the issue at the moment.

    • 0
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      McDaddy, I was thinking of one part of a couple who might have, besides their home (which might be very modest in many cases) two cars, perhaps a modest caravan to make the occasional holiday affordable, a few personal treasures that Centrelink assess as valuable, and some ready cash for emergencies. That might leave them with $400K each (or even less) to invest, yet they get NO pension income. At current rates of return, they might struggle to achieve a $20,000 income between the two of them – less even than a single pension, with fewer concessions and special benefits. While perhaps SOME costs are reduced for a couple compared with singles, in many cases the reverse applies. I could certainly live, as a single, on 1/3rd or less of what it costs to live as half of a couple. My partner’s health and special needs impose major costs. Where couples have very different life styles, hobbies, accommodation preferences, holiday preferences, etc., life as a couple can cost far more than double the cost of life as a single.

      That said, I suspect some singles who are subjected to the cruel assets test are really struggling. It depends on what the assets are. For a time, I owned a totally unsalable asset that could not return a cent of income under any circumstances, yet Centrelink valued it at nearly $400,000. Repeated submissions from private valuers achieved nothing. It cost me $180,000 and took two years to resolve that situation. During that two years, my partner and I SHOULD have been receiving a part pension.

      I know a couple who owned a commercial property that was trashed by a tenant, resulting in a $150,000 repair bill and 18 months of no income, yet according to Centrelink their one and only asset was worth $850,000 and therefore they needed no assistance from the taxpayer. Insurance covered about half the repair bill. There are always astonishing exemptions for all kinds of reasons. With insufficient ready cash to fund repairs and no income to live on, that couple sold their $850,000 asset for $350,000 in a fire sale and put their hands out for a pension. Not a wise decision, but in a state of desperation and with limited options, people can struggle to be wise, especially as age takes its toll of mental faculties.

      I also know two couples who gave money to their children. One got away – I know not how -with gifting a $2 million plot of land in a foreign country, and continued to get a full pension. The other gave a child who was in really dire circumstances $25,000 to bail them out of a major crisis – a crisis caused by a disabling accident. The latter suffered huge pension loss for having aided a child in major distress.

      Everything in our world is not black and white, contrary to what so many would like to believe. It’s a big and complicated world full of people from very diverse backgrounds and in very diverse circumstances. We all need to avoid relying on assumptions and generalizations and being jealous and judgmental if we are to achieve any kind of social justice in our world.

      I don’t understand why anyone would focus on people with $4 million, when the assets limit for a couple is less than $900,000 and for a single less than $600,000. The point here is that the assets test is unfair. It effectively deems income at well above 7.5%, whereas a relatively small reduction in assets can more than halve that deeming rate. Yes, SOME folk with assets above the thresholds are doing fine, and no doubt some of them don’t appreciate their fortunate situation. But others are suffering unfairly. The fact that one has Centrelink-assessed assets does not automatically imply a fortunate situation. The rules are harsh.

    • 0
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      Youngagain I now see you meant $400k each member of a couple. In regards to your situation, yes you were caught up in having other funds available to you, which meant you did not meet the guidelines for asset hardship.

      “A partnered person is in severe financial hardship if:
      the combined readily available funds of the person and their partner are equal to or less than the specified limit for a member of a couple (as set out below), AND
      they CANNOT reasonably be expected to sell or borrow against assets (1.1.A.290) to improve their financial position.” More than: for a member of a couple, twice the annual MBR of age pension (plus pension supplement and ES) payable to a partnered person. So your other assets had to get below about $32k for you to be considered in severe financial hardship.

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      Pity Centrelink didn’t apply that rule when I was struggling, McDaddy. Either the rules have changed or the complexity of them is such that neither those empowered to make decisions nor those asking for help can understand them properly. I suspect that many people in financial crisis struggle to access and understand information about their legal entitlements, especially since so much is written in ‘legal speak’. The other problem is that Centrelink employees get to determine whether or not a person can reasonably be expected to sell or borrow against assets. In my case, Centrelink declared the asset was salable. They just couldn’t tell me how to find a buyer and wouldn’t accept statements from real estate agents declaring nobody was interested, and explaining why.

    • 0
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      Anonymous, did you have any other assets or finances at the time?

  3. 0
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    Why not the got at us when they took rates to 17% and now we have paid off the house they’ll crucify us on the way down.

    Best to have a home, the maximum savings and the full aged pension and concessions.

    Forget saving as there just is no yield left bothering with.

  4. 0
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    The economy is more important than any individual and the rate cut has been made to assist the economy of Australia. Just as borrowers complained about very high rates in the 80’s and 90’s, now it’s the turns of investors. The board of the Reserve Bank has to look at the overall picture and make their decisions accordingly. The age pension is there as a fallback position for those who are forced to spend their capital.

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      Horace, tax cuts were reduced to allegedly boost spending would not a deeming rate cut achieve the same result? as it is at the moment the wealthy get help to increase the spending power, the needy have to suffer a reduced spending power, Please Stop Putting A Positive Spin on something which by any standard is unfair, cannot those who can afford it assist the economy of Australia?

    • 0
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      Horace has a point about the interest rate cut helping the economy but in this country everything is spent on property for some reason and so the cut will just lead to higher property prices delighting the current owners and frustrating the future home buyers. We should do away with the exemption of family property from the means test, or abolish all means and asset testing all together and let the ATO take its cut like it is the case in other countries. I would like more money invested and a smaller house but many here have a big house and keep other investments down to access the pension entitlements.

    • 0
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      Mariner identifies a real sore spot in the psyche of Australians when it comes to residential property. The idea was drummed into us by our parents from young.

      In addition to exemption of primary residence from the means test or abolition of the test, I also would like to see removal of CGT concessions, restricting negative gearing concessions to income from same category of assets and tax reforms to include replacing stamp duties with broad-based land tax.

  5. 0
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    It annoys me that an interest rate cut is always announced in the media as “good news”. It’s only good news for the minority of the population.

    • 0
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      by the same token the media never headlines increasing interest rates as being great for investors, probably because investors have less reliance upon interest income among other sources of income

  6. 0
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    I believe the government has a responsibility to earn us at the deeming rate they set! Otherwise it’s bullying older Australians!

  7. 0
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    So what is wrong with relying on part pension. Alternatively there are relatively stable shares available which pay a good dividends. Having money in cash is as dangerous as any other investment.

    • 0
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      Not everyone has the brain for share market. The government should use actual earnings instead of deeming, unless they can guarantee people’s savings DO earn at deeming rate.

    • 0
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      Lost quite a bit during the GFC, was in my 60s then. Today I prefer to hold on to the rest, getting little return and more on the part pension, but the turmoil of the share market is behind me. Have not got enough to gamble with it.

    • 0
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      Agree with Chef, a low cost ETF will return better than banks rate and deeming, no skills required. Vanguard has a couple of good ones.

  8. 0
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    So many of us pensioners are receiving part pensions because we have a part pension from overseas, and/or we have saved and have money in term deposits/ have minimal superannuation as we are women who ended up divorced but had to work part-time to be there as a parent and have not been able to save or contribute to superannuation at all. Wherever you fit in this spectrum, and I do, we are the ones being totally sacrificed at the moment. This whole issue of deeming rates needs to be tied to the RBA and not a political issue. No wonder so many people have a safe and avoid the banks right now!

  9. 0
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    The deeming rate should be equal to the bank rate set by the reserve bank,currently 0.1 %.No ifs no butts just commen sense,

    • 0
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      BS, recently it was 4.25% and you could get 5% in a TD, people were still whining and always will. You can get better than .01% now anyway.

    • 0
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      it would be easy to be more sympathetic to what is a sensible suggestion, if these same investors had been equally vocal about increasing deeming rates when bank savings were paying more than the deeming rate.

    • 0
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      Can’t get more than 1% unless you put your money in an unguaranteed area at least in a bank you can get a guarantee of $250 for each account in each bank

  10. 0
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    It is about time the Federal Govt realise Pensioners and Part Pensioners cannot live on fresh air. The deeming rates need to be adjusted to what is reality.

    • 0
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      Deeming normally is in regards to financial assets like bank deposits – so go on and start spending some. I sure do that. For part pensioners it’s easy; there is just less in the account and a higher pension. You have a problem only if you want to pass on with the capital intact for the next generation. Full pensioners are not affected anyway.

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