What are deeming rates and how do they work?

What are deeming rates?

The ‘deeming rate’ is the rate of income your financial assets are assumed to earn when you’re being assessed for the Age Pension or other support payments. Deeming is typically applied to financial assets, like savings, term deposits, shares, or managed investment funds, whether they produce an income or not.

How do deeming rates work?

The deeming rate is applied to certain financial assets and represents the particular return a person is assumed to make on their investment each year. If the actual return is higher than the deemed rate, the extra won’t be counted when it comes to working out whether you can receive the Age Pension or other support payment.
However, if the actual return is lower than the deeming rate, Services Australia may assume your income is higher than it is when it comes to calculating your Age Pension entitlements.

What are the deeming rates right now?

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

If you’re single

• 1.25% p.a. on the first $66,800 of your financial assets
  

• 3.25% p.a. on any portion of your assets worth over $66,800

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

• 1.25% p.a. on the first $110,600 of your combined financial assets
  

• 3.25% p.a. on any portion of your combined assets worth over $110,600

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

• 1.25% p.a. on the first $55,300 of each of your own and your share of joint financial assets.
  

• 3.25% p.a. on any portion worth over $55,300.

Source: Services Australia

How deeming rates work: An example

How deeming rates are applied can be confusing at first. But, once you’ve got your head around it, they’re somewhat simple to understand. Here’s an example of how they might work:

If you have less than $66,800 worth of assets, some of which is kept in a term deposit, the funds in the term deposit would be deemed at a rate of 1.25% p.a., even if your term deposit has an interest rate of 5.00% p.a.

The money generated from the extra 3.75% (the difference between the current low-level deeming rate of 1.25% p.a. and the term deposit’s interest rate) won’t be considered by the income test for your pension.

On the other hand, if you had up to $66,800 sitting in a transaction account not earning interest, the deeming rate will assume you’re actually earning returns of 1.25% p.a. on this money and your income would be assessed accordingly.

It can be worth getting professional financial advice if you’re concerned about the impact of deeming rates on your income or benefits.

What assets are affected by deeming rates?

The assets that can be impacted by deeming rates include:

• Savings accounts

• Term deposits

• Managed funds

• Listed shares and securities

• Loans or debentures you’ve provided

• Potentially your superannuation, though this depends on your age and other circumstances.

One of the few exceptions (aside from the home you live in) is an account that only contains money from a National Disability Insurance Scheme (NDIS) package.

What government payments and benefits do deeming rates apply to?

Deeming rates can apply to benefits, such as:

• Age Pension, which supports eligible Australians aged 67 years and older.
• Disability support pension, which provides financial support to those who have a physical, intellectual, or psychiatric condition that’s likely to persist for more than two years and stops them from working, according to Services Australia.
• Carer payments, which supports Australians giving constant care to someone with a disability or medical condition, or for an adult generally aged 65 or older.
• Service related benefits 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, which entitles holders to concessional benefits when it comes to their health. To be eligible, you must be of Age Pension age, not receiving any of the above benefits, and be an Australian resident or someone who holds a special category visa.

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

How does the deeming rate affect the Age Pension?

Whether you’re eligible to receive the Age Pension and how much you might get each fortnight depends on two key tests – one considering the value of the assets you own and another looking at how much income you earn. Deeming rates are used to estimate how much income your financial assets generate.

At the time of writing, single pensioners can earn up to $226 per fortnight before their pension payments are reduced, whereas a couple can earn a combined fortnightly income of $396.

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

Who sets deeming rates?

The deeming rate is set by the Minister for Social Services, with the Australian Government Actuary putting forward its recommendations. The rate is regularly adjusted in line with what’s currently happening in the wider Australian economy.

Why does the government use deeming rates?

Deeming rates provide a number of benefits to both pensioners and the economy.

They can incentivise pensioners and benefit recipients to invest their savings, instead of trying to maximise their pension at the cost of their actual income. If you earn a higher rate of income than the maximum deeming rate, it could be considered bonus income as it won’t be assessed when your income is means tested for a pension or support payment.

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 1.25% and 3.25% p.a. deeming rates. These can provide low-risk returns, while savings accounts provide easy access to cash when it’s needed.

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Deeming rates can also act as a cushion against interest rate and investment market fluctuations. A flat deeming rate can keep pension payments predictable, even if rates or markets are rising and falling.