Age Pension: Deemed income falls again with lower rates and higher thresholds

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 recent change to the deeming thresholds for the Age Pension income test, and another relatively recent change to the deeming rates applicable to financial investments. These changes may mean that you’re eligible for a greater Age Pension entitlement.

Effective since 1 July 2014, the asset value thresholds for determining what deeming rate to apply, were 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. I explain the thresholds later in the article.

Secondly, effective since 4 November 2013, the deeming rates applicable to financial assets when claiming the Age Pension, dropped in response to the sustained fall in market interest rates, and have remained at these rates. What this means for those holding financial investments, is that less ‘income’ will be counted for Age Pension eligibility, even though your financial investments haven’t changed.

For some Australians, the combination of these 2 changes 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 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.

Effective since 4 November 2013, the deeming rates applied to financial investments are:

  • 2% (previously 2.5%) up to a certain value of financial investments, and then
  • 5% (previously 4%) for any financial investments above the lower value threshold.

Since 1 July 2014 (for the 2014/2015 year), the lower asset value thresholds apply as set out below:

  • For financial investments worth up to $48,000 (for singles), and up to $79,600 (for couples). a deeming rate of 2% applies
  • For financial investments above $48,000 (singles) or above $79,600 (couples), a higher deeming rate of 3.5% applies. 

Note: The lower asset value thresholds are used to determine what deeming rate to apply, and are adjusted annually on 1 July.

The deeming rates, asset value thresholds, and how they all work are explained in more detail later in the article.

Note: The federal government has announced that from 1 July 2017, the deeming thresholds will be reset, which means that the income deemed on your financial assets will be deemed at a higher rate reducing your entitlements to the Age Pension. More specifically, from July 2017, the government intends to reset the deeming thresholds for the lower rate to $30,000 (singles) and $50,000 (couples), subject to legislation.

New rules from 1 January 2015, but not everyone is affected

SuperGuide ALERT: Currently, 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 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.

All products held by Age Pensioners before 1 January 2015 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 current Age Pension income test rules for super pensions, rather than under the deeming rules.

Deeming rates change periodically

Currently, the deeming rates are adjusted periodically, and can rise and fall depending on the investment markets 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.

When the deeming rates rise, the deemed income from financial assets (such as shares and term deposits) 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.

According to the Department of Human Services, deeming rates are set by agreement between the relevant Ministers. According to previously published information on the 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, or in this latest instance, when there was a change of government.

Important: Deeming rates don’t change as frequently as interest rates and the deeming rates are generally lower than term deposit rates, although the federal government’s latest drop in the deeming rates this time does mean that interest rates and deeming rates are becoming more aligned. You can read about how deeming works in more detail by reading the 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 2014:

  • Singles:The first $48,000 of a person’ financial investments are deemed to earn income at 2% pa (deeming rate effective since 4 November 2013) and any amount above $48,000 is deemed to earn income at 3.5%pa (deeming rate effective since 4 November 2013)
  • Couples:The first $79,600 (combined) of a couple’s financial investments are deemed to earn income at 2% pa (deeming rate effective since 4 November 2013) and any amount over $79,600 is deemed to earn income at 3.5% pa (deeming rate effective since 4 November 2013.)

Note: 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.

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 can’t receive 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

Financial investments include:

  • bank, building society and credit union accounts
  • cash
  • 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.
© Copyright Trish Power 2009-2014

Copyright for this article belongs to Trish Power, and cannot be reproduced without express and specific consent.

IMPORTANT: SuperGuide does not provide financial advice. SuperGuide does not answer all questions posted in the comments section. SuperGuide may use your question or comment, or use questions from several readers, as the basis for an article topic that we publish on the SuperGuide website. We will not disclose names or personal information in these articles. Comments provided by readers that may include information relating to tax, superannuation or other rules cannot be relied upon as advice. SuperGuide does not verify the information provided within comments from readers. Readers need to seek independent advice about their personal circumstances.

Comments

  1. Judi Gravett says:

    Hi Trisha We look forward to your newsletter each month it is very helpful. Our biggest concern now at age 61 is how we will invest our Super at 65 to ensure we have enough income for a comfortable retirement ie $57,000+ pa. We would appreciate some articles outlying the pros and cons of different options available and the cost and risk level of each. We do not want to spend our remaining years stressed about the fees andsafety of our investments. Judi and Gary

  2. How does Centerlink determine the value of a property asset? Is it market value and how is this determined?

  3. Shona hunter-Perese says:

    I’m still not clear how much money you can earn before yr age pension is affected? We are earning around $12,000 yr on investments. We re a couple.

  4. harness says:

    I have a property bought in 2002. I plan on selling within the next year and use the proceeds to start an account based pension. am I caught up with the new rules concerning deeming & capital gains which are undecipherable on the websites?

  5. Colin Park says:

    You comment the Deeming Rates have been reduced from 20 March 2013.
    What are the two rates NOW [I can find nothing on any Centrelink site].
    The first $45,400 WAS calculated at 3.00% with 4.5% on any income asset balance above.
    It is presumed the individual allowance still remains at $150.00 per period and the deduction allowed per period is still calculated @ 50%.
    It is noted the supplement allowance has now been increased to $61.20 per period.
    I would appreciate your advice.
    Thank you.

    • Hi Colin
      Thanks for your email. The new deeming rates (effective 20 March 2013) are contained in this article – 2.5% (previously 3%) and 4% (previously 4.5%)– thresholds are also contained in this article.
      For your convenience, I include the relevant 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 2012:

      Singles: The first $45,400 of a person’ financial investments are deemed to earn income at 2.5% pa (deeming rate effective from 20 March 2013) and any amount above $45,400 is deemed to earn income at 4% pa (deeming rate effective from 20 March 2013)
      Couples: The first $75,600 (combined) of a couple’s financial investments is deemed to earn income at 2.5% pa (deeming rate effective from 20 March 2013) and any amount over $75,600 is deemed to earn income at 4% pa (deeming rate effective from 20 March 2013.)
      Regards
      Trish

  6. Ian Johnston says:

    Trish. A point on a related topic. Pls let people know that the pension estimator on the Centerlink web site is wrong. The error is in the “Foreign Assets” area. If the user enters the value of an overseas asset (e.g. property) it simply ignores this and shows that the user will get a full pension (assuming you meet other criteria in calculator). I checked with Centerlink and they confirmed this part of the calculator was wrong. I found this as the help box for that line item gave an example of an overseas property as an overseas asset. To get a correct estimate, the user needs to put the value into line above which covers local assets. I did wonder about my apparent good fortune until corrected by Centerlink. I was told they will advise their IT folks re the problem.

    Regards,
    Ian

  7. David Scott says:

    I think the rules around deeming are confusing. There are very few accounts that offer interest rates anywhere near the deeming rate. I recently asked my Super scheme what the going rate was for the money they held on my behalf, should I choose to move it into cash. It was considerably lower than the deeming rate. I commented that it should be mandatory for them to adhere to the deeming rate but this was not favourably received. Therefore in order to meet the deeming rate I either have to leave it in the growth section of the investment world and have it subject to the dramatic ups and downs of the share market or take it out of the Super scheme and place it in term deposits, which locks in the money and makes life more difficult to manage. Are there any on call accounts which meet the deeming rates?

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