What are deeming rates and how do they work?

The Federal Government has promised to extend the freeze of deeming rates until at least the 1st of July 2025 as plans for a cash rate cut from the Reserve Bank of Australia (RBA) remain unlikely for the time being, prompting banks to keep interest rates up. Here’s a closer look at the latest deeming rates and how they might impact you.

What are deeming rates?

The ‘deeming rate’ is the rate of income the government assumes a person’s financial assets have earned, whether they are the actual figures or not. This rate is used to calculate a person’s income, and it can affect how much age pension a retiree receives.

The deeming rate is set by the Minister for Social Services, and is adjusted in line with what is currently happening in financial markets. The financial assets that can be impacted by the deeming rate includes savings accounts and term deposits, as well as managed funds, listed shares and securities and potentially superannuation, depending on your age and other circumstances. One of the few exceptions is an account that only contains money from a National Disability Insurance Scheme (NDIS) package – this is not subject to the deeming rate.

Deeming assumes that these financial assets earn a set rate of return, known as the deeming rate. This applies regardless of the returns the asset actually earns. For instance, at the time of writing, the government assumes that singles are earning a 2.25% per annum (p.a.) return on assets valued over $62,600 and 0.25% p.a. on assets under $62,600.

According to Services Australia, if the return you earn is higher than the deemed rates, the additional amount won’t be counted when it comes to working out whether you can receive a pension or other income support payments. However, if the return you’re earning is lower than the deeming rate, the government may assume your income is higher than it actually is, as they’ll use the deeming rate instead of the actual lower rate, when it comes to calculating your age pension entitlements.

For example, if you have a term deposit valued over $62,600 that has an interest rate of 5.00% p.a., the money generated from the extra 2.75% (the percentage above the current deeming rate of 2.25% p.a.) won’t be considered by the government when it conducts an income test for your pension.

On the other hand, if you had $62,600 sitting in a transaction account only earning 0.01% p.a., the government’s deeming rate may assume that you were earning 2.25% p.a. on this money and adjust its income test accordingly.

The freeze on deeming rates is expected to apply to about 870,000 people, according to the Australian Financial Review (AFR), and should mean their social security payments are not reduced due to any increased earnings from any interest on savings or assets.

It can often be worth seeking out professional advice when it comes to assessing the impact of deeming rates on your income and potential government benefits.

Related: Free financial advice: What to look out for and where to find it

What government payments and benefits do deeming rates apply to?

Deeming rates can apply to Australians receiving government benefits, such as:

• Age pension: The age pension can support the income of Australians who are aged 66 years and older.

• Disability support pension: This pension provides financial support to those who have a physical, intellectual or psychiatric condition that is likely to persist for more than two years and stops them from working, according to Services Australia.

• Carer payments: A payment that supports Australians giving constant care to someone with a disability or medical condition, or for an adult considered frail aged.

• Service related benefits: The service pension is granted to military veterans, their eligible partners, as well as widows and widowers, on the grounds of age or invalidity. Deeming rates can also apply to veteran payments and income support supplements.

• Commonwealth Seniors Health Card: This health care card entitles holders to concessional benefits when it comes to their health. To be eligible, you must not be receiving any of the above benefits, and be an Australian resident or someone who holds a special category visa and be of age pension age.

Deeming rates will also apply to other government benefits like youth allowance, jobseeker and parenting payments.

What are the current deeming rates?

The following deeming rates apply, at the time of writing, depending on your situation:

If you’re single

• 0.25% p.a. on the first $62,600 of your financial assets.

• 2.25% p.a. on assets over $62,600.

If you’re a member of a couple and at least one of you get a pension

• 0.25% p.a. on the first $103,800 of your combined financial assets.

• 2.25% p.a. on combined assets over $103,800.

If you’re a member of a couple and neither of you get a pension

• 0.25% p.a. on the first $51,900 of each of your own and your share of joint financial assets.

• 2.25% p.a. on anything over $51,900.

Source: Services Australia

How does the deeming rate affect the age pension?

How much you are eligible to receive in age pension payments depends on two key tests – the value of the assets you own, and how much income you earn. According to Services Australia, deeming rates are used to figure out how much a person’s financial assets generate in terms of income. In this way, it can affect your age pension and other social security payments.

For instance, at the time of writing, single pensioners can earn up to $212 per fortnight before their pension payments are reduced. A couple can earn a combined fortnightly income of $372 before their pension may be altered.

So, if a retiree is deemed to have earned less income on their private assets than they actually did, they may be eligible to receive higher welfare payments.

Why does the government use deeming rates?

Deeming rates are a way to incentivise pensioners and government benefit recipients to invest their savings into investment options like term deposits, savings accounts, shares and property, rather than trying to maximise the amount of pension they can get at the cost of their actual income. If you earn a higher rate of income than the maximum deeming rate, it’ll generally be considered bonus income which won’t be assessed when your income is means tested for a pension.

With the cash rate remaining high for the time being, many pensioners may look to high interest rate term deposits and savings accounts to get ahead of the 0.25% and 2.25% p.a. deeming rates. These investment options can provide guaranteed returns as long as they are supplied by an authorised deposit-taking institution (ADI), which are covered by the government’s financial claims scheme for up to $250,000.

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For those looking for higher rates of return, you might be interested in property, shares, managed funds, ETFs and bonds, which typically offer a larger rate of return than savings accounts and term deposits, but are affected by economic conditions and are a riskier investment overall. ETFs (Exchanged Traded funds) could be worth considering if you’re looking for a lower cost option for diversifying your portfolio, as ETFs allow you to invest in a range of companies, with some ETFs tracking indexes such as the S&P 500, ASX 200 or Australia specific sectors like banking.

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Before committing to an investment, it’s often worth consulting a qualified financial professional and reading the investment’s Product Disclosure Statement (PDS) and Target Market Determination (TMD), as well as other relevant documentation.

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