2024 Deeming Rate Changes - Plan Ahead

Most of us can cope with adversity if it doesn’t arrive as a total surprise. Knowing what’s coming is often the best way to put plans in place to mitigate financial shocks. That’s why the subject of deeming rates needs to raised.

All’s been quiet on this topic for a while and there’s a reason for that. Back in pre-Covid days there were justifiable grievances that deeming rates were way too high. We’ve now entered a time when one could argue that they are far too low. Why is this the case? And if it is, can you prepare for what seems inevitable – an increase on July 1 this year?

Deeming rates are an aspect of means testing that affect full and part-Age Pensioners and self-funded retirees alike. They also affect those living in age care facilities, so you could say that all older Australians are likely to be affected, in some way, if they change on 1 July as expected. 

When was deeming first used?

Deeming rates are the backbone of the Australian means testing system for social security payments and benefits. They were first introduced in 1991when they applied to bank deposits only. In the words of the Department of Social Security (DSS), they were introduced, 

“to encourage income support recipients to maximise their total disposable income by investing to gain returns of at least the deeming rate.”

 Deeming was extended in 1996 to cover banks, building and credit societies, term deposits, managed investments, loans and debentures and listed shares and securities.   

Which assets are currently deemed?

The financial assets to which the Centrelink deeming rate is now applied include:

  • Savings accounts and term deposits
  • Managed investments, loans and debentures
  • Listed shares and securities
  • Certain income streams
  • Certain gifts you may make
  • Any assets held in a SMSF as these are treated as financial assets

Who is affected by deeming?

As noted above, just about every older Australian. In the first instance, the deeming rate is used to measure the returns that those on an Age Pension might receive when investing in market products as listed above. As noted by the DSS, 

‘By treating all financial investments in the same way, the deeming rules encourage people to choose investments on their merit rather than on the effect that the investment income could have on your pension entitlement.’ 

So deeming rates are applied to the total market value of the investment rather than the actual returns. There is also the argument that calculating someone’s income across a range of different returns would be overly complex for Age Pension assessments. Using one form of return measurement makes much more sense.

Self-funded retirees also have income assessed using deeming rates. This happens as part of the income test during an application for a Commonwealth Seniors Health Card. This card is income tested only – assets do not count except as the basis for deemed income. 

Separately, deeming is used to calculate means-tested contributions for those who live in an age care residence.

Historic lows 

In line with previous low cash rates, deeming rates have been set at an historically low rate since May 2020. They have also been frozen since the Covid Pandemic in 2020-2022 in order to give those on the Age Pension (or similar benefits) more certainty and belief in a strong social security safety net which helps them withstand the rising cost of living.

Will they go up on 1 July?

This is very likely. Firstly, the conditions for freezing deeming rates have largely abated. The rest of the economy no longer claims it is operating under ‘Covid’ restrictions, so specific Covid-related conditions for the means test no longer make sense. Secondly, a series of 13 Reserve Bank interest rate rises since April 2022 means that it is fair to conclude returns on investments have also risen commensurately. The current rates of 0.25% and 2.25% simply do not represent market returns any more.

How much could they increase by?

The rates are set at the discretion of the Minister for Social Services. Therefore they can be increased as much as the Minister likes. There is an argument that many people are receiving benefits such as an Age Pension or a CSHC and if their returns were assessed in line with market returns, they simply would not qualify.

But, to quote Sir Humphrey from Yes, Minister, it will take a ‘brave’ politician to decide to raise deeming rates in line with the current official cash rate of 4.35%.

What we may see, instead, is a ‘half-way’ measure whereby the deeming rates revert to those of 2015-2018 (i.e. pre-Covid), when they were 1.75% and 3.25% respectively. But this is guessing. Before June or early July, we simply will not know.

Are there any actions you can take?

This depends very much on your situation.

If you are receiving a full Age Pension you may find that your entitlements are not affected by deeming changes. If, however you are on a part-Age Pension – maybe you qualified narrowly – then you may wish to consider the assets you are holding that are deemed and those that are not. For instance money invested in your house, through renovations or paying down a mortgage, reduces deemed financial investments but does not increase a deemed asset, owing to the house being exempt. This example is used for illustrative purposes only. It’s important to use an Age Pension calculator and work through different scenarios if you believe that you might lose entitlement due to higher rates. You may also wish to seek advice to discuss whether you can change where and how you are invested. 

Similarly with the CSHC, it’s smart to check now if you hold a card or plan to apply, to see if any deeming changes could unsettle these plans.

Wish to check the current rates? 

Retirement Essentials’ free Age Pension eligibility calculator takes all these deeming rates into account so if in doubt you can always check your eligibility
And our Maximising entitlements consultations enable you to check out all the rules you need to know and how deeming might affect your ultimate benefits.