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 2 important changes to the deeming rules for the Age Pension income test. These changes may mean that you’re eligible for a greater Age Pension entitlement.
Effective 1 July 2013, 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. I explain the thresholds later in the article.
Secondly, effective from 4 November 2013, the deeming rates applicable to financial assets when claiming the Age Pension, drop in response to the sustained fall in market interest 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 from 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
- 3.5% (previously 4%) for any financial investments above the lower value threshold.
Since 1 July 2013, the lower asset value thresholds apply as set out below:
- For financial investments worth up to $46,600 (for singles), and up to $77,400 (for couples). a deeming rate of 2% now applies (effective from 4 November 2013)
- For financial investments above $46,600 (singles) or above $77,400 (couples), a higher deeming rate of 3.5% now applies (effective from 4 November 2013).
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.
Deeming rates change periodically
SuperGuide ALERT: The treatment of 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 so 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, In late November 2013, the Coalition federal government introduced legislation to remove this special treatment for superannuation pensions. Although announced by the previous ALP federal government, the Coalition government has confirmed that this special treatment will be changing for future super pensions from 1 January 2015, and superannuation pensions will be subject to deeming rules (for more information see SuperGuide article Start Planning! New income test rules mean less Age Pension). We will update this article when the bill becomes law.
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 is 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 2013:
- Singles: The first $46,600 of a person’ financial investments are deemed to earn income at 2% pa (deeming rate effective from 4 November 2013) and any amount above $46,600 is deemed to earn income at 3.5%pa (deeming rate effective from 4 November 2013)
- Couples: The first $77,400 (combined) of a couple’s financial investments are deemed to earn income at 2% pa (deeming rate effective from 4 November 2013) and any amount over $77,400 is deemed to earn income at 3.5% pa (deeming rate effective from 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 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.
Important: The former ALP government announced it proposed to extend the deeming rules for Age Pension income test, so they apply to new superannuation pensions, from 1 January 2015. According to the former ALP government, all products held by pensioners before 1 January 2015 would be 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 would continue to be assessed under the current Age Pension income test rules for super pensions.
The new Liberal government has not yet disclosed its intention on this proposed change. SuperGuide will update this article and notify its newsletter subscribers when the Liberals provide some information on this measure. For more information on this proposed change see SuperGuide article New income test rules mean less Age Pension.