Realise Your Dream
(By Mark Teale)
Over the last couple of weeks, you may have seen several articles in the media suggesting to the government that as a result of the recent cuts in the official interest rates by the Reserve Bank of Australia the age pension deeming rates should be reduced.
For pre-retirees and for retirees the concept of deeming can appear difficult to understand.
So, I thought I would take the opportunity and try to explain the concept of deeming and how it operates.
As you would be aware a person’s age pension entitlement is based on the income and assets test; deeming is at the heart of the income test.
Deeming was introduced for the purposes of the age pension assessment in 1996 and assumes a rate of return on your investments regardless of the actual rate of return.
For example, if you have money invested in shares which are paying a dividend of 5% or money invested in a term deposit earning 1.25% – it makes no difference under the deeming rules as they are both assessed to be earning the same rate of return or interest rate.
Deemed rates of return apply to all financial assets which include bank accounts, term deposits, managed accounts and shares. These types of investments, and all account-based pensions that commenced on or after 1 January 2015 are subject to the deemed rates of return.
How does deeming operate?
All the investments – financial assets – held by an age pensioner are added up. Currently for a single person the first $51,800 is subject to an interest rate of 1.75% with the balance subject to an interest rate of 3.25%. For a couple, the first $86,200 is subject to the lower interest rate of 1.75%
I should point out that the thresholds mentioned in the previous paragraph did increase on the 1st of July, however the deemed interest rates have not been adjusted since March 2015.
In March 2015, the interest rate on a 12-month term deposit was just 3%. Today’s interest rate on the same investment is close to 1%.
So maybe it is time for the government to review the deeming interest rates
The question you may ask is – would a drop of 1% in the deeming rates make that much of a difference to a person’s pension?
Let’s use the following numbers as an example. A single age pensioner with financial assets totaling $200,000 and not subject to the assets test.
Under the current deemed interest rates the person’s age pension would be reduced by $594 per annum. If the deemed interest rates were to drop by 1% to 0.75% and 2.25% the person would receive the full age pension an increase of $594 per annum.
So yes, a minor drop of 1% in the deemed interest rates can make a small but possibly substantial difference to an age pensioner receiving a part rate age pension.
I should also mention for those independent retiree residents in aged care facilities a drop in the deeming rates of interest may also result in a drop in their means tested care fees.