Deeming freeze a win for Age Pensioners

Why the decision to keep deeming rates on hold may be a window for interest rates.

In delivering the second reading of the Appropriation Bill (No. 1) 2024–25, otherwise known as the latest federal budget, the Treasurer announced that the current freeze on social security deeming rates will continue until 30 June 2025.

It was a passing reference, but one that potentially has big income implications for an estimated 450,000 people receiving a full or part government Age Pension payment.

The announcement also signals, indirectly at least, that official interest rates may be lower by mid next year, when the latest freeze on deeming rates will end, than they are now.

What are deeming rates?

Deeming rates are used by Services Australia to determine the amount of Age Pension payable to singles and couples who generate additional income from financial investments.

They’re also used to assess eligibility for the Commonwealth Seniors Health Card and to determine co-contributions for aged care services.

The deeming rates essentially “deem” that all financial investments earn the same percentage return, regardless of what they actually earn. The government’s definition of investments for the purposes of deeming is broad, from money invested in a savings account or term deposit, to managed investments, listed shares and other securities, loans, and debentures.

A deeming rate of 0.25% currently applies to the first $60,400 of financial investments held by a single age pensioner, and to $100,200 held by a couple. A higher deeming rate of 2.25% applies to any financial investments above those thresholds.

The benefits of having a deemed rate of return are that it helps keep Age Pension payments steady for those with outside financial investments, instead of having them move up and down based on the performance of their assets.

Any returns above the set deeming rates are not counted as income for Age Pension calculation purposes.

By treating all financial investments in the same way, the deeming rules encourage people to choose investments on their merit rather than on the effect the investment income may have on their pension entitlement.

What the deeming rates freeze means

Deeming rates are not changed frequently, and keeping the current deeming rates on hold undoubtedly provides more income certainty to many Age Pension recipients with financial investments.

Indeed, the last time there was a change to deeming rates was back in May 2020, when they were cut from a much higher 1% (for assets below $51,800) and 3% (for assets above $86,200).

Deeming rates have historically been aligned to the prevailing official cash rate, and 2020 marked the start of the rapid falls in interest rates to near zero as governments around the world moved to buttress their economies against the impacts of COVID-19.

However, with rates having now been lifted sharply to tackle surging inflation, there were some expectations that the deeming rates would now be lifted to be more closely aligned to the current 4.35% cash rate (which is at a 12-year high).

Vanguard foresees core inflation falling to 3% year-over-year by the end of 2024, still solidly above the midpoint of the Reserve Bank’s 2%–3% target range.

As such, the Reserve Bank is likely to be one of the last central banks in developed markets to cut rates, doing so only in 2025.

The government will be watching these developments closely in terms of deciding its next move on deeming rates.

Source: Vanguard May 2024
This article has been reprinted with the permission of Vanguard Investments Australia Ltd. Copyright Smart Investing™ GENERAL ADVICE WARNING Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) (VIA) is the product issuer and operator of Vanguard Personal Investor. Vanguard Super Pty Ltd (ABN 73 643 614 386 / AFS Licence 526270) (the Trustee) is the trustee and product issuer of Vanguard Super (ABN 27 923 449 966). The Trustee has contracted with VIA to provide some services for Vanguard Super. Any general advice is provided by VIA. The Trustee and VIA are both wholly owned subsidiaries of The Vanguard Group, Inc (collectively, “Vanguard”). We have not taken your or your clients’ objectives, financial situation or needs into account when preparing our website content so it may not be applicable to the particular situation you are considering. You should consider your objectives, financial situation or needs, and the disclosure documents for the product before making any investment decision. Before you make any financial decision regarding the product, you should seek professional advice from a suitably qualified adviser. A copy of the Target Market Determinations (TMD) for Vanguard’s financial products can be obtained on our website free of charge, which includes a description of who the financial product is appropriate for. You should refer to the TMD of the product before making any investment decisions. You can access our Investor Directed Portfolio Service (IDPS) Guide, Product Disclosure Statements (PDS), Prospectus and TMD at vanguard.com.au and Vanguard Super SaveSmart and TMD at vanguard.com.au/super or by calling 1300 655 101. Past performance information is given for illustrative purposes only and should not be relied upon as, and is not, an indication of future performance. This website was prepared in good faith and we accept no liability for any errors or omissions. Important Legal Notice – Offer not to persons outside Australia The PDS, IDPS Guide or Prospectus does not constitute an offer or invitation in any jurisdiction other than in Australia. Applications from outside Australia will not be accepted. For the avoidance of doubt, these products are not intended to be sold to US Persons as defined under Regulation S of the US federal securities laws. © 2024 Vanguard Investments Australia Ltd. All rights reserved.

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