Why the unfreezing of deeming rates in 2025 matters.
Using deeming rates is the way Centrelink calculates the income you earn from your financial asset, regardless of whether you receive that income or not.
In May 2020, the then Morrison Government froze deeming rates to protect retirees during the economic uncertainty of COVID-19. This temporary measure was extended twice, most recently to July 2025, to help pensioners manage rising living costs.
The most recent freeze is now scheduled to end – but will it? With a federal election approaching and cost-of-living concerns still high, some wonder if the Albanese Government might extend it again.
If the freeze does end, how much might deeming rates rise? And how can (or – is it possible for ?) retirees (to) prepare?
What are deeming rates?
Centrelink uses deeming rates to estimate income from financial assets (excluding homes, home contents, cars, etc.) rather than using actual investment returns or the income you received.
The current rates are:
- Singles: 0.25% on assets up to $60,400, 2.25% on amounts above
- Couples: 0.25% on assets up to $100,000, 2.25% on amounts above.
Deeming rates were much higher in the past, but were reduced as interest rates fell. They have remained unchanged since 2020.
Why the deeming freeze matters
Deeming rates are usually adjusted to reflect inflation and market conditions. Since the freeze, however, they have fallen well below actual returns, meaning retirees may be receiving higher pension payments than they would have if the deeming rates reflected actual market conditions.
Any increase in deeming rates could reduce Age Pension entitlements – especially for part-pensioners and renters already struggling with rising costs.
Before COVID, retirees sometimes complained that the deeming rates were too high. Now the opposite is true.
- When deeming was first frozen in 2020, the RBA cash rate was just 0.25%
- Since then, the Reserve Bank has raised interest rates 13 times in a row to curb inflation, peaking at 4.35% in late 2023.
- Only this month, the cash rate reduced slightly by 25 basis points to 4.1%
This means that deeming rates – locked at 0.25% and 2.25% – are now well below the actual cash rate. If adjusted in line with market conditions, retirees could see their assessed income increase, even if their actual earnings haven’t changed.
Who will be affected?
Deeming rates play a major role in the income test for social security benefits. They affect:
- Age Pension recipients (full and part)
- Commonwealth Seniors Health Card (CSHC) applicants
- Self Funded retirees with financial assets (who hold a CSHC)
- Residents of aged care facilities, as deeming is used in means testing.
If the deeming rates increase, some retirees may lose access to benefits such as the Age Pension or the Pension Concession Card. Others may see their pension payments reduced due to a higher deemed income.
What happens when the freeze ends?
From 1 July 2025, deeming rates are set to be unfrozen, allowing the government to adjust them to reflect economic conditions.
While interest rates remained low in 2020 and 2021, they began rising sharply in 2022 and remain high today. This makes a deeming rate increase a definite possibility.
If this happens, retirees assessed under the income test could see their deemed income rise – regardless of their actual returns.
Deeming rates are set at the discretion of the Minister for Social Services, meaning they could remain where they are or rise by any amount. If deeming rates were adjusted to match the current cash rate of 4.1%, it would be a major change in an election year – one that could have a significantly negative impact on retirees.
Could the freeze be extended again?
With an election looming and cost-of–living concerns still a key issue, the current government could choose to extend the freeze again, as they did in 2023, possibly announcing this in a March Budget. Similarly a different government post-election could also choose to continue the freeze. But even if either side of politics does this, deeming rates won’t stay frozen forever.
A more likely scenario is that deeming rates return to something similar to pre-COVID levels, when they were:
- 1.75% for lower thresholds
- 3.25% for higher thresholds
This would still represent a significant increase, meaning retirees should start planning for potential changes now.
What can you do to prepare?
Even if you’re not impacted right away, an increase in deeming rates could affect your retirement income in the years to come. A rise after 30 June 2025 may reduce pension entitlements, particularly for those assessed under the income test.
There are three steps that you might take to be prepared for any changes to the deeming rates:
- Ensure you know exactly how you are affected by current deeming rates.
- Understand how a one or two percent change in deeming rates could affect your payments or eligibility. If you are ruled under the income test, with every extra dollar of deemed income, you will lose 50 cents of Age Pension payment each fortnight.
- Create a plan B if this change will cause significant hardship – If the changes could cause financial difficulty, consider adjusting your investments or spending. You may want to consider:
- Your investment structure: moving funds into non-deemed assets like superannuation (if you are under 67), or paying down your mortgage could reduce your deemed income.
- Your spending habits: Adjusting your spending habits could be necessary if your income decreases due to higher deeming rates.
Checking your Age Pension eligibility is easy with the free Retirement Essentials Age Pension Entitlement Calculator.
If you want to plan ahead, a one-on-one consultation with a Retirement Essentials adviser can help you understand how future changes might affect you and what steps you can take.
What do you think?
Have you thought about how a deeming rate increase might affect your pension entitlements next year?
If deeming rates rise, would you adjust your investments or spending habits?
