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Lower deeming rates mean less income: pensioners should shop around!

Feb 212013
 
 Posted by on 21/02/2013

With the Minister for Families, Community Services and Indigenous Affairs, Jenny Macklin, recently announcing a reduction in the pension deeming rates, effective 20 March 2013, now is a great time for pensioners to shop around – or potentially earn less income!

What is a deeming rate?

Lower Deeming RatesEssentially, someone’s eligibility for a pension is determined by means testing: an assets test, which measures the level of assets that a person holds and an income test, which measures the level of income that someone receives. Rather than assessing applicants on the actual amount of income they earn from their investments, though, the Department of Human Services makes an assumption about the level of income based on the amount invested. This assumed income is called the “deeming rate”.

Deeming rates – singles

Investment value Current deeming rate Deeming rate as at 20/3/13
Up to $45,400 3.00% pa 2.50% pa
Over $45,400 4.50% pa 4.00% pa

 

Deeming rates – couples

Investment value Current deeming rate Deeming rate as at 20/3/13
Up to $75,600 3.00% pa 2.50% pa
Over $75,600 4.50% pa 4.00% pa

What does a lower deeming rate mean?

In one respect the lower deeming rates are a great government initiative and a positive for part-pensioners. A lower deeming rate means that the government is assuming pensioners to be earning less income, which can help to improve their eligibility for a pension. In lowering the deeming rate, the government estimates that part-pensioners will receive an average pension increase of $6.80 per fortnight.

There is also a potential downside though for those who have their money invested in a bank account which mimics the deeming rate. In this instance, the lower interest they will be earning could more than offset the pension increase.

Consider the following examples of the interest potentially earned on a bank account that pays the deeming rate.

Singles – Approx interest per fortnight

Balance Current deeming rate – interest pf New Deeming rate – interest pf Difference
$50,000 $60.35 $50.73 $9.62
$100,000 $146.88 $127.65 $19.23
$200,000 $319.96 $281.50 $38.46

Source: Canstar 

 

Couples – approx. interest per fortnight

Balance Current deeming rate – interest pf New Deeming rate – interest pf Difference Example: 12 month term deposit @ 4.50%
$50,000 $57.69 $48.08 $9.61 $86.54
$100,000 $129.46 $110.23 $19.23 $173.08
$200,000 $302.54 $264.08 $38.46 $356.15

Source: Canstar

For a single pensioner, a $38 per fortnight drop in income can make a significant difference to their ability to meet their living expenses!

What can pensioners do?

Shop around! At the end of the day, the government doesn’t care how much a pensioner earns – they will simply assume them to be earning the deeming rate. Therefore it makes sense for pensioners to earn the best rate they safely can from their cash. A 12-month term deposit earning a rate of 4.50%, for example, will provide a significantly better return than the deeming rate. And there are plenty of other options out there.  Check the latest star ratings and interest rates on savings accounts.

Back to Savings Accounts…


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