How interest rate cut will affect retirees

UPDATED: The Reserve Bank of Australia (RBA) cut official interest rates on Tuesday, which is good news for anyone with a mortgage but bad news for millions of retirees with money in the bank.

And unless the Social Services Minister revisits deeming rates, which have not been changed since 2015, it’s also bad news for pensioners.

Self-funded retirees in particular, and retirees in general, are advised to keep some money in the bank for emergencies. But if they are relying on using the interest that money earns to supplement their income, alternative investment strategies are required.

Five years ago, a bank term deposit could earn upwards of four per cent interest, now it is more likely to be earning a little over two per cent.

Inflation is well below the RBA’s target at 1.3 per cent and the official cash rate was cut by 0.25 percentage points to a record low of 1.25 per cent. Another cut is expected in August.

The Australian reports that since 1 January, the big four banks have slashed their five-year term deposit rates by between 85 and 35 basis points.

Sally Tindall, research director at financial comparison site RateCity, sees no signs of a economic turnaround.

“The people who will be hurt the most by an RBA rate cut are people like retirees and young Australians who are saving for something like a house deposit or a car or things like that,” she told The Australian.

“If term deposits and savings accounts continue to fall, people may start seeking alternatives that come with greater risk, like on the stockmarket or peer-to-peer lending.

“That’s something to be aware of as well because people need to be comfortable with where they are putting their nest egg.

“If people stopped putting money into the bank, it would force banks to be more competitive in this space. But if you look at the APRA (Australian Prudential Regulation Authority) data, their loan books are steadily increasing.”

The cut in official interest rates is likely to put extra heat on the RBA and Social Services Minister Anne Ruston to reassess deeming rates.

The purpose of deeming is to encourage social security recipients to invest their money in order to receive the best possible return.

Currently, if you are single, you are deemed to earn 1.75 per cent on investments of less than $50,200 and 3.25 per cent on any investments above that.

If you are a couple and one or both of you receive benefits, you are deemed to earn 1.75 per cent on a balance of less than $83,400 and 3.25 per cent on larger investments.

YourLifeChoices member PlanB had his say on deeming rates last month saying: “It is a bloody disgrace that we are being deemed to be getting 3.25%. You can get NOWHERE near that even with a term deposit. The highest I can get for three months is 2.38.”

Tricky says: “If the deeming rate is 3.25% and the Government assumes we can receive this amount, why don’t they (the Federal Government) offer Australian bonds at the rate of 3.25% for eligible senior citizens? The LNP would much prefer to obtain a benefit by deceiving our senior citizens who contributed to making this a great country.”

Will the predicted interest rate cut affect your retirement? Do you believe deeming rates should be reviewed more regularly?

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Written by Janelle Ward

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