Don’t spend those deeming dollars just yet

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There is consensus – from the Government, from the Opposition, from older Australians – that deeming rates need to change. There has been consensus for several weeks. There is talk but, as yet, no action. And the conjecture is that any approved changes may only take effect in September – the second of the twice-yearly indexations that aim to keep the pension in touch with the cost of living.

The estimated 600,000 pensioners affected by deeming rates are counting the days and wishing they were counting the dollars in their pockets  – perhaps so they could spend the extra money and boost a sagging economy. Consumer confidence has, according to the Westpac-Melbourne Institute, hit a two-year low.

What we know.

Deeming rates, used by Centrelink to determine Age Pension entitlements after taking into account an average return on a variety of investments, have not changed since 2015.

If you’re a member of a couple and one or both receive a pension, the first $86,200 of combined financial assets is subject to the deemed rate of 1.75 per cent. Anything over $86,200 is deemed to earn 3.25 per cent.

The current rate for singles is 1.75 per cent for the first $51,800 of financial investments, and 3.25 per cent above that.

The official interest rate, as determined by the Reserve Bank of Australia, was 2.25 per cent at the start of 2015. It is now one per cent.

Who is saying what
Social Services Minister Anne Ruston is responsible for deeming rates. She says she will present a plan to cut deeming rates to Prime Minister Scott Morrison, Treasurer Josh Frydenberg and Finance Minister Mathias Cormann for final approval.

She told YourLifeChoices on 1 July: “Following the Reserve Bank’s decision to reduce the official cash rate last month, I requested advice from my department on the current deeming rate settings. I am now considering that advice. This is a complex area given the deeming rate applies to a range of assets.”

She has denied suggestions the Government is stalling to save money and said it understood the repercussions for older Australians on fixed incomes.

On Saturday, Mr Frydenberg promised action on deeming rates by Christmas. He admitted pensioners had been hurt by interest rate reductions, but argued that returns from other asset classes including superannuation and managed funds had outperformed the deeming rate.

“Some of those returns have obviously been stronger than what we’ve seen at a time of low interest rates from bank deposits,” he said.

Opposition social services minister Linda Burney has repeatedly called for urgent action.

“It’s hypocritical for the Government to say, ‘Oh well, the Reserve Bank has set the cash rate at one per cent, and the Government is demanding banks hand on that one per cent to mortgage holders, when their deeming rate is well above anything that a pensioner or part-pensioner can earn.”

YourLifeChoices publisher Kaye Fallick is a passionate advocate for older Australians.

She says: “How complex can the determination of a deeming rate really be? Given the last time it was changed was 2015, it seems the minister concerned has had four years to plot the steady decline of Age Pensioner returns on their investments.  

“If tax cuts for workers can be banged through both houses of Parliament in week one, waiting until Christmas for a reduction in the deeming rates reveals how little older voters now matter.

“Perhaps we should rename deeming rates as ‘retiree taxes’ so a sense of urgency can be better understood?”

The cost?

A recent Labor Party analysis says retirees could be better off by between $62 and $3875 a year – but only if the deeming rate is reduced to 1.25 per cent. And there is no suggestion from government sources the deeming rate will go that low.

The same Labor analysis says a cut from 3.25 per cent to 2.25 per cent will likely cost the Commonwealth $1 billion over four years.

And on top of the ‘correction’ to current deeming rates, there is a push for ‘lasting change’ to the system.

But let’s take it one step at a time.

Have you mentally ‘spent the money’ when deeming rates are eventually changed? Do you believe they should be changed more regularly?

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RELATED LINKS

Investment strategies and common mistakes

Don't make the mistake of converting all your assets to cash on the day you retire.

Could deeming rates eat away at your pension?

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

Comment: Retirees hurt by tax cuts

Cuts will see retirees fall further behind, writes Kaye Fallick.

Written by Janelle Ward



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