What Is A Deeming Account and What Interest Rate Does It Earn?

Original author: TJ Ryan

While deeming accounts have historically been popular, fewer institutions appear to be offering them in our current low interest rate environment. Canstar explains what deeming accounts are and what interest rate retirees can expect to earn on them.

The Federal Government recently announced it will lower deeming rates come September this year, with payments backdated to July 2019. This comes off the back of calls from retiree groups as well as the Opposition to reduce the deeming rate in response to the Reserve Bank cutting the official cash rate to a new low of 1%

While lower deeming rates may come as welcome news to some pensioners, it might not if you have money in a deeming account. This is because deeming accounts must pay interest at the deeming rate – so a reduced rate may mean less interest.

What is deeming?

To start with, let’s explain what the deeming rate is. 

The ‘deeming rate’ is the rate of income the government deems that (or assumes) a person’s financial assets are earning. This is assumed regardless of how much the asset has actually earned. 

The government uses deeming for certain income assessment tests, such as the Age Pension and Newstart. Therefore, changes to the deeming rate can affect the payment amounts a person receives. 

According to the Department of Human Services (DHS), deeming rates apply to a range of financial assets, such as savings accounts, term deposits, listed shares and some income streams.

What are the current deeming rates?

There are two deeming rates – a higher deeming rate and a lower deeming rate. The lower rate applies up to a certain threshold. After your asset’s balance reaches this threshold, the higher deeming rate then applies to the remaining balance. Which threshold applies to you will depend on whether you are single or part of a couple and whether you already receive the pension. 

Following the recent government changes, the DHS says the new rates are as follows: 

If you’re single: The first $51,800 of your financial assets has a deemed rate of 1% applied. Anything over $51,800 is deemed to earn 3%.
If you’re a member of a couple and at least one of you receives a pension: The first $86,200 of your combined financial assets has the deemed rate of 1% applied. Anything over $86,200 is deemed to earn 3%.
If you’re a member of a couple and neither of you already receives a pension: The first $43,100 of each of your own and your share of joint financial assets has a deemed income of 1% per year. Anything over $43,100 is deemed to earn 3% per year.

Importantly, when the deeming rate is lower than your actual returns, you can often earn more without your pension eligibility or payment amount being affected. On the flip side, if you are earning less than the deeming rate, typically the government will assume your income is higher than it actually is, and it may reduce your pension accordingly.

What is a deeming account?

A ‘deeming account’ is a type of bank account that must pay interest at the legislated deeming rate. To be eligible to open a deeming account, you generally need to be receiving an eligible government pension and/or be a self-funded retiree over 55 years old. 

Be aware that there may be accounts marketed as ‘pensioner accounts’, ‘retirement accounts’ or similar which,  while resembling deeming accounts in some ways, may not guarantee interest at the government’s deeming rate.

Which institutions offer a deeming account?

Deeming rates were introduced back in 1991. For the first 20 years of deeming, the higher rate roughly aligned with RBA cash movements. During this time, a number of institutions (including the big four banks) offered deeming accounts that paid interest at the deeming rate. Today, though, deeming accounts are far less common. In fact, there are no deeming accounts in Canstar’s database at the time of writing. 

There are, however, financial institutions in Canstar’s database that offer pensioner or retiree accounts that pay tiered interest at the current deeming rates. However, these are not technically deeming accounts and they are not legally required to pay the actual deeming rate. Additionally, while these accounts have two tiered interest rates, the threshold is not quite the same as what is set by the DHS for singles. 

If you’re looking for a high interest earning product, you might alternatively like to compare some of the top term deposits and savings accounts on Canstar’s database.

Image Source: Rattana.R (Shutterstock)

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