Age Pension deeming rates cut, at last

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The Federal Government has finally bowed to pressure to cut Age Pension deeming rates but stopped short of passing on the full cut in official interest rates.

The government will cut the lower deeming rate from 1.75% to 1% for financial investments worth up to $51,800 for single pensioners and $86,200 for pensioner couples. The upper deeming rate for savings above these thresholds will be cut more modestly, from 3.25% to 3%.

Seniors advocates welcomed the move, but for some it was too little, too late. National Seniors Australia chief advocate, Ian Henschke said the Coalition Government’s $600 million commitment was welcome but did not go far enough. He calls the current deeming regime a “pension tax’’.

Ian Yates, chief executive of the Council on the Ageing (COTA) was more positive, saying that if the Government replaced the deeming rate with actual earnings on financial assets, the majority of pensioners caught in the deeming net would be worse off.

The change will increase payments for more than 600,000 age pensioners and almost 350,000 people receiving the carer’s payment, disability support pension, parenting payment and Veterans’ Affairs pension.  

Families and Social Services Minister, Anne Ruston said affected pensioners will receive up to $40.50 a fortnight for couples and $31 a fortnight for singles.

Why deeming rates had to fall

Under the Age Pension income test, you are ‘deemed’ to earn a certain rate of interest on your savings and investments regardless of the amount you actually receive. The last time deeming rates were adjusted was back in 2015. Since then, the Reserve Bank has cut interest rates five times leaving deeming rates out of whack with the returns many pensioners are earning on their savings.

For more on how deeming works, see SuperGuide article Deeming rates (and calculator) for the Age Pension income test. 

And for the background to recent calls to cut deeming rates, see SuperGuide article Pension tax deemed unfair.

How much will people receive?

The table below shows the maximum increase in pension payments per fortnight for singles and couples, with annual amounts in brackets.

Increase in pension payments per fortnight (annual equivalent)

Pensioners will begin to receive the benefits from September 20 when pensions are next adjusted for inflation, but any extra payments will be backdated to July 1.

Ian Yates says it needs to be remembered that 75% of Age Pensioners are not affected by deeming rates. Singles can have up to $163,000 in the bank and couples up to $286,100 before they begin to lose some of their Age Pension under the income test.

And of the 25% who are affected by the higher deeming rate, he says 70% currently earn more than 3.25% because they hold market-linked investments such as shares, managed funds or superannuation funds that are returning over 5%.  

The people most affected by current deeming rates are part-pensioners with substantial sums in bank deposits.

Term deposit rates from the big four banks are currently below 2.5% but many pensioners prefer the certainty of capital guaranteed bank deposits to the uncertainty of market-linked investments where neither income nor capital are guaranteed.

“I had one pensioner in his 70s with $600,000 in term deposits and trying to live off the interest”, says Yates. Like many retirees, this man was afraid to spend any of his capital in case he needed it later on.

Where to from here?

All seniors advocates agree there should be a more objective measure to determine deeming rates. They consider the latest cuts to be an interim response prompted by recent cuts to official interest rates and are hopeful that the issue will be considered by the Treasurer’s proposed Retirement Income Review.

Currently, deeming rates are set at the discretion of the Social Services Minister but Minister Anne Ruston has told seniors advocates she is happy to discuss alternatives. National Seniors has called for an independent body to set deeming rates, but COTA believes it’s unlikely either political party will agree to this.

Yates would like to see deeming rates indexed and moved according to an objective measure as currently happens twice-yearly with the Age Pension. Even better, pensioners could have their income assessed according to rates they actually earn on their financial assets.

Deeming was originally introduced because it was difficult to keep track of people’s actual earnings, but this has become much easier with increased automation. However, any move to align deeming rates with real rates of return could be politically unpalatable.

 “It used to be that deeming and the cash rate were more closely entwined because people didn’t have much in the way of retirement savings and held more of what they did have in term deposits. Now people have a more diverse range of income sources”, says Yates.

Deeming is a complex issue and one we have not heard the last of.