Devil in the deeming rates for part pensioners

11 July 2019

Opinion: Steve Mickenbecker, Group Executive Financial Services, Canstar

The government is considering reducing the deeming rate for the first time since March 2015. The lower rate is now 1.75% and the upper rate 3.25%, compared to a cash rate of 1.00%. Try getting that upper rate on your savings now!
Devil in the detail for deeming rates (1)
Source: fizkes (Shutterstock)

The history speaks for itself, but it seems that it has been forgotten.

Deeming rates were introduced in 1991 for the purpose of assessing the income means test for the pension. These were heady days. We had the recession ‘‘we had to have’’, in a high interest rate, high inflation environment. The cash rate started 1991 at 12% and closed at 8.5%. Oh for the good old days – they were interesting!

Deeming was brought in to stop a group of pensioners from gaming the system. The pension was then and is now means tested against both assets and income. Some savvy would-be pensioners back then were choosing to place funds in low income investments, sacrificing income for capital growth, or at the extreme placing funds in zero interest accounts. They knew where they stood relative to both means tests and balanced their investments accordingly.

No government likes to see its systems rorted, even more so when it gives a free kick to the banks of zero interest rate deposits. The government of the day reacted by introducing the deeming rate and successfully plugged the loophole.

Deeming rates back then were set to reflect the savings rates that pensioners could reasonably expect to achieve, and that principle was generally adhered to for the first 20 years of deeming by a rough alignment with RBA cash rate movements. When the cash rate fell, so did the deeming rate, and vice-versa. (That aside, banks even provided specific deeming accounts for pensioners at the actual deeming rate.)

Or at least that’s what happened until 2012 when the current interest rate reduction cycle started. In July 2011 the upper deeming rate was 4.5% and the RBA cash rate was 4.75%. By July 2013 the upper deeming rate was 4% and the cash rate 2.75%. In just two years the deeming rate had gone from 0.25% below the cash rate to 1.25% above it. This is a devastating turnaround for part pensioners.

Fast forward to today and we have seen six cash rate reductions of 0.25% without a single change to the deeming rates.  The lower deeming rate is now 1.75% and the upper 3.25% compared to a 1% cash rate. That is now 2.25% above the cash rate!

The reality today is that pensioners cannot earn the upper deeming rate on bank savings, and yet it is that 3.25% they are being deemed to earn that is used to assess their part pension.

The top six month term deposit rate on our database today is 2.45% and the average only 2.02%. Online savings accounts are even worse with the highest base rate (that is the ongoing rate without a bonus period) on our database 2.00% and the average 1.13%.  Most of the larger banks’ rates are now only 0.30% and will likely fall again.

Deeming rates are now so out of alignment with available savings rates that the original principle has been long forgotten.

The message for part pensioners is to take matters into your own hands now to search out the reasonable offers in the market.  Don’t wait on the largesse of politicians to restore the balance before you do it. There is likely some relief coming your way, but you could well end up disappointed.

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About Steve Mickenbecker

Steve Mickenbecker
Source: Vitalii Tairov (Canstar)

Steve is the Group Executive of Financial Services at Canstar. He has decades of experience in the finance sector and is passionate about helping consumers make informed decisions with their personal finances.


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