The deeming rate freeze is a win for pensioners

We take a look at how much Aussies on the age pension stand to benefit from the government's decision to keep deeming rates unchanged.
By · 28 May 2024
By ·
28 May 2024 · 5 min read
comments Comments
Upsell Banner

One of the announcements in the Federal Budget was that the existing two-year freeze on deeming rates would be extended by another 12 months. The freeze is good news for many Aussies on the age pension as an increase in deeming rates could have led to reduced age pension income. Self-funded retirees eligible for the Commonwealth Seniors Health Card also benefit from deeming rates staying on hold. 

Let's take a closer look at how deeming rates work and why the freeze is good news for those on the age pension. 

What are deeming rates?

To be eligible for the age pension, you need to pass income and assets tests. Deeming rates are used to calculate the income you are assumed to earn on your savings and investments for the income test.

Rather than expecting people to make a full and exact calculation of their retirement income - which might include income from shares they own, bank interest and payments from an account-based superannuation income stream - deeming allows a calculation where the value of financial assets is 'deemed' to earn an amount of income. The lower the deeming rate the better.

For a single person, the deemed rate of income from financial assets is 0.25% on the first $60,400 of assets, and then 2.25% on assets above this amount.

For a couple. the deemed rate of income from financial assets is 0.25% on the first $100,200 of combined assets, and then 2.25% on assets above this amount.

In an investment climate where online bank accounts and term deposits are earning rates above 4% a year and share income is 3% to 4% a year before the benefit of franking credits, deeming rates are a fair amount below the level of income financial assets are actually likely to earn.   

Let's look at how this works in practice with a hypothetical example. Adam is single, a non-homeowner and has $400,000 invested in financial assets. He earns an average income of 4% a year meaning he'd earn $16,000 a year from his investments. However, under the current deeming rates his investments are only deemed to earn $7,792 for the purposes of the age pension income test. So, that means Adam can earn more money from his investments without his pension taking a hit. 

A potential boost of more than $4,500 a year in age pension

Now, let's explore what impact deeming rates being frozen could have on Adam's pension. Historically, deeming rates have moved in line with the cash rate. The last time the cash rate was around the level it is now was back in early 2012. At the time, deeming rates were significantly higher - 3% on the lower threshold and 4.5% on the upper threshold. 

If we use these values to calculate Adam's age pension, his deemed income would be $17,094 making him eligible for $23,129 of age pension.

Under the current deeming rates, where his deemed income is $7,792, Adam is eligible for $27,780 of age pension. That means the freeze is worth more than $4,500 in age pension income for Adam.


Google News
Follow us on Google News
Go to Google News, then click "Follow" button to add us.
Share this article and show your support
Scott Francis
Scott Francis
Keep on reading more articles from Scott Francis. See more articles
Join the conversation
Join the conversation...
There are comments posted so far. Join the conversation, please login or Sign up.