Deeming rates: Time to plan ahead?

Deeming rates are no longer such a hot topic of conversation amongst retirees. And there’s a good reason for that. 

Going back a couple of years, they were a constant source of frustration. This frustration has largely evaporated. That’s because, during the height of economic uncertainty in the early days of the Covid pandemic, the then-Morrison Government took the decision to freeze deeming rates until 30 June 2023, to give retirees some sense of stability. This ‘freeze’ was subsequently extended by the Albanese Government until 30 June 2024.

Before the freeze, many retirees described deeming rates as punitive. This is because interest rates were at all-time lows, and with many retirees invested in cash, they were earning little to no interest on their savings. But Centrelink was ‘deeming a higher rate than they actually earned.

Current deeming rates 

Deeming rates are reviewed by the Minister for Social Services and can change without warning.

The current deeming rates are:

• 0.25% on financial assets up to $60,400 (Singles) or $100,200 (Couples)
• and 2.25% on financial assets over these thresholds.

Since the deeming rates freeze on the above amounts was first put into place, Australia has experienced no fewer than 13 interest rate increases, the most recent announced by the Reserve Bank of Australia on Tuesday 7 November. The ‘official’ cash rate is now 4.35%. Right now many banks are offering rates of 4.8%-5.40% for term deposits invested for 12 months. So after years of having their income ‘overvalued’, retirees suddenly seem to be winning.

Here’s a quick example:

Bill and Sheena have joint assets of $350,000 in super, $20,000 in a term deposit and $50,000 in shares. Here’s their actual 30 June 2023 earnings and how Centrelink deemed these assets:

Assets		Actual return FY to 30 June 2023	Actual $ return	Centrelink Deemed
Super	$350,000	+7%	$24,500
Term deposit	$20,000	+3.5%	$700
ASX shares	$50,000	+6%	$ 3,000
				$100,200 x .25% $319,800 x 2.25%
Total	$420,000		$28,200	$7,446

From this quick example, you can see that Bill and Sheena are benefitting from a deeming rate which is much lower than market reality. Their income from investments is nearly four times what Centrelink deems them to be earning.  They will get a higher Age Pension than if their actual earning were used.

To which assets are the deeming rates applied?

The financial assets to which the Centrelink deeming rate is 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

Deeming rates do not just affect Age Pensioners

Self-funded retirees also have income assessed using deeming rates. This occurs when their income is assessed as part of 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. 

The ‘good times’ won’t roll forever, however. There is a short 8-month window until the deeming rates freeze ends and are reviewed and – probably – increased. The rates are set at the discretion of the Minister. Therefore they can be increased as much as the Minister likes. But it would be fair to assume that the first increase is likely to be modest, to give those on government benefits time to take stock of their assets and associated income and make any changes they feel are appropriate. Our free Age Pension eligibility calculator takes all these deeming rates into account so if in doubt you can always check your eligibility. 

What does this mean for you?

External changes are just that – you can’t influence them, and so need to consider, instead, what you might do in response. Understanding, in the first instance, the percentage return on each of your different asset classes is important. You will then know what you are actually earning. And you can quickly -using the above amounts – assess how much Centrelink is deeming you to earn. You can then play with these numbers and, assuming say a 1 or 2% increase, how this ‘extra’ deemed income could affect your fortnightly payments – or your entitlement to a Commonwealth Seniors Health Card. Understanding the gap between what Centrelink deems you earn and the actual amount also helps you review your asset mix. You may then wish to change the mix of investments if there is a better way overall of apportioning your savings.

Understanding super and how to organise both your super savings and other investments is one of the many important aspects of prudent retirement income management. If you would like to better understand how super works our consultation will allow you to learn the rules and ask your most pressing questions.

Maximising entitlements is another part of the puzzle. Why not join an experienced adviser to review your own entitlements and how you might increase your retirement income?

Are deeming rates still a topic of conversation in your household?

If so, feel free to share your concerns …