Note: This article explains the latest deeming rates and the deeming thresholds for the Age Pension income test. If you are seeking information about the latest increases in the thresholds for the Age Pension income test and Age Pension assets test see SuperGuide article Age Pension: More Australians entitled to payments since July 2016, or the latest Age Pension payment rates see SuperGuide article Age Pension: March 2016 rates now apply (until September 2016).
If you own financial investments and receive the Age Pension, or you hope to claim the Age Pension, then you need to be aware of a relatively recent change to the deeming rates applicable to financial investments, and the annual change (every July) to the deeming thresholds for the Age Pension income test. These changes may mean that you’re eligible for a greater Age Pension entitlement.
Effective since 20 March 2015, the deeming rates applicable to financial assets when claiming the Age Pension, were lowered in response to the sustained fall in market interest rates. (The deeming rates were previously lowered on 4 November 2013). What this means for those holding financial investments, is that, since 20 March 2015, less ‘income’ is counted for Age Pension eligibility, even though your financial investments haven’t changed.
According to the then Minister for Social Services, Scott Morrison, more than 770,000 Australian part-pensioners and allowance recipients benefited from the drop in deeming rates from March 2015: on average, by $3.20 of extra Age Pension a fortnight.
In addition, effective since 1 July 2016, the asset value thresholds for determining what deeming rate to apply, increased. The asset value thresholds are used to determine what deeming rate applies to financial investments for the purposes of the Age Pension income test. Currently, the asset value thresholds are indexed every July (the next indexation takes place from July 2017). I explain the thresholds later in the article.
For some Australians, the combination of an increase in the deeming threshold PLUS lower deeming rates may mean the difference between a FULL or PART Age Pension, or a larger PART Age Pension, or even being eligible for the Age Pension for the first time.
What is deemed income and why does it matter?
If you own financial investments, such as shares and term deposits (and even superannuation for new Age Pensioners), and you plan to claim the Age Pension, then you need to be aware that the ‘income’ counted for the financial assets you own, under the Age Pension income test, is not the actual income earned on those investments.
The income counted from financial investments when working out your eligibility for the Age Pension, is known as deemed income. Deemed income is when you assume a rate of return even when that rate isn’t necessarily what you actually earn on your investment.
Note: Effective since 1 January 2015, new Age Pensioners or existing Age Pensioners with new superannuation pensions (started on or after 1 January 2015) will also have their superannuation pension assets subject to the deeming rates for the purposes of the Age Pension income test. I explain this new rule later in the article.
What are the deeming rates and deeming thresholds?
Deeming rates: Effective since 20 March 2015 and applicable indefinitely (until the government adjusts the rates again), the deeming rates applied to financial investments are:
- A deeming rate of 1.75% (previously 2.0%) up to a certain value of financial investments, and then
- A deeming rate of 3.25% (previously 3.5%) for any financial investments above the lower value threshold.
Note: The deeming rates were previously lowered on 4 November 2013: the deeming rates that applied to financial investments from 4 November 2013 until 19 March 2015 were:
- A deeming rate of 2% (previously 2.5%) up to a certain value of financial investments, and then
- A deeming rate of 3.5% (previously 4%) for any financial investments above the lower value threshold.
Deeming thresholds: Since 1 July 2016 (for the 2016/2017 year), the indexed asset value thresholds apply as set out below:
- For financial investments worth up to $49,200 (for singles), and up to $81,600 (for couples). a deeming rate of 1.75% applies.
- For financial investments above $49,200 (singles) or above $81,600 (couples), a higher deeming rate of 3.25% applies.
Note: The indexed asset value thresholds are used to determine what deeming rate to apply, and are adjusted annually on 1 July.
The deeming rates, and the asset value thresholds, and how they all work are explained in more detail later in the article.
Note: The federal government had announced that from 20 September 2017, the deeming thresholds would be reset, which meant that the income deemed on your financial assets would be deemed at a higher rate reducing your entitlements to the Age Pension. More specifically, from 20 September 2017, the government intended to reset the deeming thresholds for the lower deeming rate to $30,000 (singles) and $50,000 (couples). The federal government is NO LONGER proceeding with this measure.
New rules since 1 January 2015, but not everyone is affected
For Age Pensioners in receipt of the Age Pension before January 2015, the treatment of super pension payments for Age Pension purposes is treated differently than other type of income because some of that pension payment is considered a return of capital; which means that Centrelink doesn’t double count the drawing down of pension assets as income. There is a special formula to work out this income amount for Age Pension purposes.
For anyone receiving the Age Pension for the first time (or who has reapplied) on or after 1 January 2015, or for an existing Age Pensioner starting a super pension on or after 1 January 2015, the treatment of super pensions when assessing for the Age Pension income test has changed. Rather than a special calculation identifying an asset test exempt amount, and deducting this amount from the income received from the pension, super pensions falling under the new rules are subject to deeming, as set out in this article.
Note: All products held by Age Pensioners before 1 January 2015 (and who were already Age Pensioners as at 31 December 2014), are grandfathered indefinitely and continue to be assessed under the existing rules for the life of the product so no current pensioner will be affected, unless they choose to change superannuation pension products. Superannuation pensions in place before 1 January 2015 will continue to be assessed under the old Age Pension income test rules for super pensions, rather than under the revised deeming rules.
Deeming rates change periodically
Currently, the deeming rates are adjusted periodically, and can rise and fall depending on the investment markets and changes in general interest rates, and what the government decides to do.
For example, during the 2008/2009 year, the deeming rates were progressively halved (from 4% and 6% reducing to 2% and 3% respectively) due to the falls in interest rates. When interest rates increased, the deeming rates increased to 3% and 4.5%, before dropping to 2.5% and 4% respectively from March 2013, and then 2% and 3.5% respectively from 4 November 2013, and then falling again to 1.75% and 3.25% from 20 March 2015.
When the deeming rates rise, the deemed income from financial assets (such as shares and term deposits, and from 1 January 2015 certain super pensions) counted for the Age Pension also rises, although that’s assuming your assets are still valued at the same level. Clearly, the value of a person’s financial assets can fluctuate as well, depending on the type of financial investments that a person holds.
Likewise, when the deeming rates fall, the deemed income linked to your financial assets also falls, assuming your assets are valued at the same level, and this fall in deemed income can mean a greater Age Pension entitlement.
According to the Department of Human Services, deeming rates are set by agreement between the relevant Ministers. Based on previously published information on the DSS (formerly FaHSCIA) website, the deeming rates are monitored on an ongoing basis. Any changes made to the deeming rates usually coincide with the indexation of pensions, to reduce disruption to pensioners by reducing the number of changes to their payments. Even so, changes to the deeming rates can be made at any time if there are very significant movements in interest rates.
Important: Deeming rates don’t necessarily change as frequently as interest rates and the deeming rates are generally lower than term deposit rates, although currently the deeming rates applicable to higher value asset thresholds are higher than term deposit rates, which I believe penalises Age Pensioners. The federal government’s delay in further lowering the deeming rates does mean that interest rates and deeming rates are out of alignment at the lower end, and potentially at the higher end, depending on the investments that retirees own. I presume that the government believes that Age Pensioners with more than $49,200 (or $81,600 as a couple) in financial investments are holding those investments in shares rather than term deposits.
You can read about how deeming works in more detail by reading the Department of Human services website page on deeming Department of Human Services web page on deeming.
Asset value thresholds change 1 July each year
The asset value thresholds used to determine what deeming rate to apply, are adjusted annually on 1 July, while the actual deeming rates can change periodically (see earlier paragraphs).
Under the Age Pension income test, financial investments are deemed to earn individuals a specified rate of return, regardless of the actual rate of return. Asset value thresholds, effective from 1 July 2016:
- Singles: The first $49,200 of a person’s financial investments are deemed to earn income at 1.75% pa (deeming rate effective since 20 March 2015) and any amount above $49,200 is deemed to earn income at 3.25% pa (deeming rate effective since 20 March 2015)
- Couples: The first $81,600 (combined) of a couple’s financial investments are deemed to earn income at 1.75% pa (deeming rate effective since 20 March 2015) and any amount over $81,600 is deemed to earn income at 3.25% pa (deeming rate effective since 20 March 2015.)
Note: Centrelink assesses financial investments at their net market value. Department of Human Services (Centrelink) can exempt investments from the deeming rules in certain circumstances, such as where a financial investment has failed. You can find out about deeming exemptions by reading the Department of Human Services web page on deeming: Department of Human Services web page on deeming.
Background: You must satisfy both an income test and an assets test to become an Age Pensioner, and the test that gives you the lowest amount of Age Pension is the test that prevails. If you pass the assets test but fail the income test, or fail the assets test and pass the income test, you will not be eligible for the Age Pension.
The Department of Human Services website outlines the definition of ‘financial investments’ for the purposes of the Age Pension income test as follows:
Financial investments include:
- bank, building society and credit union accounts
- term deposits
- cheque accounts
- friendly society bonds
- managed investments
- assets held in superannuation and rollover funds held if you are of Age Pension age
- listed shares and securities
- loans and debentures
- shares in unlisted public companies
- gold, silver or platinum bullion.
Financial investments do not include
- your home or its contents
- cars, boats and caravans
- antiques, stamp or coin collections.
For more information on the Age Pension rules, including payment rates, see the following SuperGuide articles:
- Age Pension: More Australians entitled to payments since July 2016
- Age Pension: March 2016 rates now apply (until September 2016)
- Age Pension: Income test thresholds applicable since July 2016
- Age Pension: Assets test thresholds applicable since July 2016
- Take note: Age Pension age increasing to 67 years (not 70 years)
- Age Pension: Is my super benefit counted towards the Centrelink Pension assets test?
- Age Pension: Does my superannuation lump sum count for income test?