Age Pension: Deemed income falls with interest rates, finally

From 20 March 2013, the deeming rates applicable to financial assets when claiming the Age Pension, will 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, this drop in 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 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 20 March 2013, the deeming rates applied to financial investments are 2.5% (previously 3%) up to a certain value of financial investments, and then 4% (previously 4.5%) for any financial investments above the lower value threshold. The deeming rates, asset value thresholds, and how they all work are explained in more detail later in the article.

Deeming rates change periodically

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%. The lower asset value thresholds (currently $45,400 for singles and $75,600 for couples), used to determine what deeming rate to apply, are adjusted annually on 1 July.

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 Ministers for the Department of Families, Housing, Community Services and Indigenous Affairs (FaHCSIA), and the Department of Education, Employment and Workplace Relations (DEEWR). 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.

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 delay in dropping the deeming rates this time can mean that some Australians will have deemed income that is higher than the actual interest that they are earning on term deposits. You can read about how deeming works in more detail by reading the Department of Human Services web page on income (click here) and also the 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 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.)

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 (click here).

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
• 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.