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. The deeming rate is a fixed percentage which is applied to your assets to determine how much assessable income you receive from them – the Department of Human Services will use to determine the size of the payment you will receive. Deeming rates apply to all sorts of assets, including savings accounts, shares and income streams, and they’re most commonly used for retired Australians to determine the size of the Age Pension someone will receive.
Deeming is very useful because you don’t need to fill in large amounts of paperwork about your income from each investment – which may change often – and lets you focus on investing for your own needs, rather than worrying about how it will affect your payments. There are several different deeming rates for different life situations, such as for singles or couples, and the rates are set by the Minister for Social Services, meaning they can change year-on-year.
Current Department deeming rates, from 1 July 2018, are as follows:
|If you’re single: The first $51,200 of your financial assets has a deemed rate of 1.75% applied. Anything over $51,200 is deemed to earn 3.25%.|
|If you’re a member of a couple and at least one of you receive a pension: The first $85,000 of your combined financial assets has the deemed rate of 1.75% applied. Anything over $85,000 is deemed to earn 3.25%.|
|If you’re a member of a couple and neither of you receive a pension: The first $42,500 of each of your own and your share of joint financial assets has a deemed income of 1.75% per year. Anything over $42,500 is deemed to earn 3.25% per year.|
So for example, if you’re a single person on income support, Centrelink will assume that you’re earning an income totaling 1.75% of the first $51,200 of investments that you have, 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 the deeming rate for your life situation is lower than your real investment returns, you can earn more from your investments without your pension eligibility being affected. So if your deeming rate is 1.75%, but the shares you own earned 3.75%, that extra 2% you earn doesn’t count against your Age Pension!
Here’s an example:
Jenny 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 year.
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 income at 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.
Which institutions offer a deeming account?
A number of institutions across Australia offer a deeming account for eligible retirees. Based on CANSTAR’s September 2017 research, this includes:
|Institution||Up to $51,199*||$51,200 or higher|
|Australian Military Bank||1.75%||3.25%|
|Holiday Coast CU||1.75%||3.25%|
|Select Encompass Credit Union||1.75%||3.25%|
|Teachers Mutual Bank||1.75%||3.25%|
|*Some institutions move to 3.25% at balance of $49,200 and some at $49,201
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
- 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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