What Are Deeming Rates & What Are The Current Rates?

The Federal Government has lowered deeming rates for the first time since March 2015. This follows calls to lower it in the wake of the Reserve Bank of Australia (RBA) cutting the cash rate to a record low of 1.00% at its latest board meeting earlier this month.

The government announced the lower deeming rate would drop from 1.75% to 1.00%, while the upper deeming rate would be cut from 3.25% to 3.00%. According to the Morrison government, the $600 million change is set to put up to $804 a year back in the pockets of some single pensioners and could give couples up to an extra $1,053 a year.

This is the first time deeming rates have changed since March 2015, when the then-Minister for Social Services Scott Morrison lowered the higher and lower deeming rates by 0.25% each. At the time, the RBA’s official cash rate was sitting at 2.25%.

So what are deeming rates? What are the current rates? And what does a lower deeming rate mean for pensioners?

What is the deeming rate?

The ‘deeming rate’ is the rate of income the government assumes a person’s financial assets to earn. This is used to calculate a person’s income and can affect how much pension a person receives. 

A person’s financial assets can include assets such as savings accounts and term deposits, as well as managed funds, listed shares and securities and potentially superannuation, depending on your age and other circumstances. Deeming assumes these financial assets earn a set rate of income (known as the ‘deeming rate’). This applies regardless of what the asset actually earns. For example, the government now assumes that singles are getting a 3% return on assets over $51,800 and 1% on assets under $51,800. 

According to the Department of Human Services (DHS), if your return is higher than the deemed rates, this additional amount you have actually earned towards your income won’t be counted in working out whether you can receive a pension or other income support payment. On the other hand, if the interest you’re earning is lower than the deeming rate, the government may assume your income is higher than it actually is.  

Here’s an example:

If Joan has a term deposit of $45,000 earning interest of 2.00% p.a., her income from that would be around $900 a year. However, the DHS would assume (deem) that Joan earned a rate of 1% on that $45,000 – and therefore an amount of $450 a year. The difference of $450 would not be counted towards Joan’s income. 

At the same time, if a person’s assets are earning interest at a lower rate than the deeming rate, the government will still assume the higher deemed rate and may make pension deductions. This is of particular concern for a number of Australians now, as savings accounts and term deposit rates chop and change following the RBA’s second cash rate cut this year.

How does the deeming rate affect the pension?

According to the DHS, the government uses deeming to figure out how much a person’s financial assets are worth as income. It can therefore affect how much a person receives in pension and other social security payments. At the time of writing, the DHS says single pensioners can earn up to $174 per fortnight before their pension payments will be reduced, whereas couples can earn a combined $308. 

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

What are the current deeming rates?

There are two deeming interest rates that can apply depending on the value of your investment – a higher deeming rate and a lower deeming rate. The lower deeming rate applies up to a threshold, with investment amounts above this threshold attracting the higher deeming rate. This threshold varies depending on whether you are a single or a couple. 

The government has announced the new rates will be backdated to 1 July 2019. The current deeming rates are now as follows:

Current deeming rates – singles

Investment value Current deeming rate
Up to $51,800 1% p.a.
Over $51,800 3% p.a.

Current deeming rates – couples

If you’re a couple and at least one of you receives a pension:

Investment value Current deeming rate
Up to $86,200 1% p.a.
Over $86,200 3% p.a.

If you’re a couple and neither of you already receives a pension:

Investment value Current deeming rate
Up to $43,100 1% p.a.
Over $43,100 3% p.a.

Here’s an example:

A couple has financial assets of $150,000 and both receive the pension. The government would deem the first $86,200 on this to earn 1% p.a. – so $862 a year. The remaining balance of $63,800 would be deemed to earn 3% p.a. – an amount of $1,914. This would total to $2,776 a year, or about $107 a fortnight.

 

Image Source: bbernard (Shutterstock)


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