What you need to know about deeming rates

Money and Life
(Financial Planning Association of Australia)

For older Australians looking to make the most of their finances in retirement, deeming rates can be an important factor in their income situation. Find out what deeming is all about and how the recent changes in deeming rates could affect your retirement income.

What is deeming?

The deeming rate is used by Centrelink to work out assumed income from your financial assets. It assumes these assets earn a set rate of income, no matter how much they really earn.

The deeming rate can be important for older Australians when they're applying to receive Age Pension payments. To be eligible for the Age Pension, you must reach Age Pension age and be under assets and income test limits. The assets test takes into account the dollar value of savings plus any assets you own, in Australia and overseas, except for your family home if you live there.

For the income test, Centrelink apply a deeming rate to your financial assets to calculate an assumed income earned from those assets. The real amount you receive from your assets whether that's dividends from shares or interest from a term deposit could actually be more or less than the Centrelink calculation. The deeming rate used for your income test depends on the total value of your financial assets. For assets up to a certain threshold, the lower of two deeming rates will be used to calculate your income. For assets above that threshold, Centrelink will use the higher rate. That threshold will be different depending on whether you're single and or in a couple.

Whether you receive a full or part pension depends on calculations for both the income and assets tests. Whichever of the two tests gives a lower rate will be the one used to determine whether you'll be paid a pension and how much your pension will be.

Changes to deeming rates

On 14 July 2019, the Federal Government announced cuts to the lower deeming rate from 1.75% to 1% and the upper rate from 3.75% to 3%. The lower rate will apply for single people with up to $52,000, and for couples with up to $86,000, in financial assets.

The last time deeming rates had been changed was in March 2015. Since then, the Reserve Bank of Australia has cut the cash rate five times, reaching a new low of one per cent on 2 July 2019. Given that interest rates have been falling for more than four years, this change will be welcome news to older Australians who may have actually been earning less than the deeming rate from their savings and other financial assets.

What does this mean if you're retired

Whether this change is going to make a difference to your finances, depends on your individual situation. "It really depends on whether it's your assets or your income that determine your Age Pension entitlement," says Anne Graham, CERTIFIED FINANCIAL PLANNER® professional and CEO at Story Wealth Management. "If your pension rate is based on the assets test, the change in deeming rates is unlikely to have an impact on your eligibility for the Age Pension or how much you receive. On the other hand, for older Australians who aren't receiving the Age Pension due to the income test, or are getting less than the maximum payment, they may benefit from the change in deeming rates."

Anne also suggests the change in deeming rates could take the pressure off retirees struggling to meet their cost of living in a low interest rate environment. "Many people prefer not to take risks with their money because they know it's got to last them throughout retirement," says Anne. "They'd naturally lean towards a savings account or term deposit to earn an income from their capital. But if they're not getting enough in earnings from these defensive assets to cover their living costs, they might go against their risk preferences and switch to growth assets like shares and managed funds. They can be torn between the need for income and the potential risk of losing capital."

"If a cut to deeming rates allows people to rely on the Age Pension for more of their essential living costs, it may help them get the balance right between maintaining their current income and having peace of mind about their financial future."

Who can help you manage your retirement income

Deeming rates are just one of the factors involved when managing your finances to maximise retirement income from all sources, including government benefits. "There really are so many different inputs involved and some of them can be very complex," says Anne. "Deemed income for the Age Pension is one consideration, then there may be tax considerations for your actual income when you're making choices about financial assets, including property as well as savings and investments."

The Moneysmart and Centrelink websites are both a good starting point for information on deeming rates, the Age Pension and other types of retirement income. Some Centrelink hubs provide a Financial Information Service (FIS)where you can talk to an officer about your finances. "These are great sources for the detailed information you might need to make decisions," says Anne. "But they're not able to offer advice on your different options. A CERTIFIED FINANCIAL PLANNER® professional will talk to you about the Age Pension and the rest of your finances within the bigger picture of your retirement lifestyle and goals. They can help you come up with a strategy for a secure income that takes account of potential changes to all sorts of things, whether that's deeming, interest rates, inflation or current superannuation policy."