What are deeming rates and what are the current rates?

When you’re planning for, or already in, retirement, you want your money to work hard. Thanks to deeming rates in Australia, you could potentially reap rewards when your money earns more than a set level of return.

Both the Coalition and Labor have promised to freeze deeming rates for two years as the Reserve Bank of Australia starts to raise the cash rate, prompting banks to raise their interest rates. Here’s a closer look at the latest deeming rates and how they might impact you.

What is the deeming rate?

The ‘deeming rate’ is the rate of income the government assumes a person’s financial assets have earned. 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 financial markets are doing. 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 package – this is not subject to the deeming rate.

Deeming assumes 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% return on assets valued over $53,600 and 0.25% on assets under $53,600.

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 when it comes to calculating your age pension entitlements.

The freeze on deeming rates is expected to apply to about 885,000 people and should mean their social security payments are not reduced due to any increased earnings from any interest on savings.

It could be a wise idea to seek out professional advice when it comes to assessing the impact of deeming rates on your income.

What are the current deeming rates?

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

•  If you’re single, the deeming rate is:
  • 0.25% on the first $53,600 of your financial assets
  • 2.25% on assets over $53,600.
•  If you’re a member of a couple and at least one of you get a pension:
  • 0.25% on the first $89,000 of your combined financial assets
  • 2.25% on combined assets over $89,000
• If you’re a member of a couple and neither of you get a pension:
  • 0.25% on the first $44,500 of each of your own and your share of joint financial assets
  • 2.25% on anything over $44,500.

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 $180 per fortnight before their pension payments are reduced. A couple can earn a combined fortnightly income of $320 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.

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