What is a deeming account and what interest rate does it earn?

Historically, deeming accounts have been popular, but fewer institutions appear to be offering them in our low interest rate environment.  CANSTAR explains deeming and what retirees can earn in a deeming account

What is deeming?

The “deeming rate” is the name used for income that the Department of Human Services assumes you make based on the value of your investments, instead of the income the investments really earn. This is helpful because you don’t need to fill in large amounts of paperwork about your earnings from each investment, and your pension can be approved more quickly.

Current Department deeming rates, from 1 July 2016, are as follows:

If you’re single and receive an income support payment, the first $49,200 of your financial investments is deemed to earn income at 1.75% per annum and any amount over that is deemed to earn income at 3.25% per annum
If you’re a member of a couple and at least one of you receive a pension, the first $81,600 of you and your partner’s combined financial investments are deemed to earn income at 1.75% per annum and any amount over that is deemed to earn income at 3.25% per annum
If you’re a member of a couple and neither of you receive a pension, the first $40,800 for each of your own and your share of jointly owned financial investments are deemed to earn income at 1.75% per annum and any amount over that is deemed to earn income at 3.25% per annum

So for example, for a single on income support, the first $49,200 of investments that you have the government will assume that you’re earning 1.75% of income. That’s irrespective of what you really do earn!

It’s important to understand deeming rates because they are used by Centrelink in the income test for the Age Pension, to determine the level of pension you will receive. When deeming rates are lower than real investment rates,  you can earn more from your investments without your pension eligibility being affected.

 

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Here’s an example:

case study term depositJenny has a term deposit of $45,000 earning 3.20% per annum. The income she earns from this term deposit is around $1,440 per annum.

When Jenny applies for the pension, she doesn’t have to look up how much she’s actually earning from the term deposit.

The Department assumes (“deems”) that she earned a rate of 1.75% – meaning an amount of $787 in income.

What is a deeming account?

A “deeming account” is an at-call cash account which, in order to be called a deeming account legally have to pay interest at the legislated deeming rate. To be eligible to put your money in a deeming account, you need to be receiving an eligible pension or be a self-funded retiree over the age of 55.

Investors should be aware that while deeming accounts legally have to pay interest at the legislated deeming rate, there are also many accounts marketed as “pensioner accounts” or “retirement accounts” or other names along those lines that are not deeming accounts. The way that they are marketed might give the impression that they are a deeming account – but actually they’re not and the interest rate they pay is not tied to the deeming rate.

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Which institutions offer a deeming account?

A number of institutions across Australia offer a deeming account for eligible retirees. Based on CANSTAR’s September 2016 research, this includes:

Institution Up to $49,199* $49,200 or higher
Australian Military Bank 1.75% 3.25%
Defence Bank 1.75% 3.25%
Holiday Coast CU 1.75% 3.25%
P&N Bank 1.75% 3.25%
QBANK 1.75% 3.25%
Select Encompass Credit Union 1.75% 3.25%
Teachers Mutual Bank 1.75% 3.25%
The Mutual 1.75% 3.25%
UniBank 1.75% 3.25%
*Some institutions move to 3.25% at balance of $49,200 and some at $49,201
Source: www.canstar.com.au

Interestingly, since the two cuts in official cash rate (in May and August) this year, bringing Australia’s official cash rate to a historic low of just 1.50%, a number of institutions have moved away from offering true deeming accounts. Institutions that have removed their deeming accounts since April this year include:

  • ECU Australia
  • G&C Mutual Bank
  • Qld Police Credit Union
  • QT Mutual Bank
  • Queenslanders CU
  • Maitland Mutual
  • Victoria Teachers Mutual
  • BankVic
  • Your Credit Union

And remember: lower deeming rates mean less income. In the face of a falling cash rate, deeming rates have fallen over the past few years. Keep an eye on any deeming decision made by the Department of Human Services, because falls in deeming rates will translate into falls in your equivalent bank account deeming rates.

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