Do you want to learn about all the important aspects of deeming that you need to know?
Deeming rates are an important concept that older Australians need to understand to get the most out of their retirement finances.
Learn the fundamental concepts behind deeming rates and get a look at the latest changes that may influence your retirement income.
Wealth Path financial services say, “retirement might seem like a long way off. Still, making sure you have a proper asset allocation strategy will improve the odds that your retirement portfolio will endure.”
The deeming rate is a tool Centrelink uses to calculate the assumed income to be assigned to your assets. The deeming rate assigns your assets a set income rate that can vary (sometimes significantly!) from your actual earnings.
For most Australians, deeming rates become important when they apply for Age Pension payments. Eligibility for the Age Pension depends on a few key variables. You have to reach the proper age, of course. You must also pass under the limits set for the assets and income tests.
What falls under the assets test includes your savings and your significant assets, both in Australia and abroad. Your family home is exempted from the test, providing that you still live in it.
The deeming rate is applied to your assets to create an assumed income figure from your assets, which is then used in the income test. The actual income you derive from assets, such as share dividends or term deposit interest, may be more or less than Centrelink’s assumed income.
The total value of the assets collected for the assets test dictates what deeming rate is used in your income test. There are two deeming rates available for income calculation.
If the total dollar value of assets falls below a certain threshold, Centrelink uses the lower deeming rate. The higher rate is applied if your assets exceed the threshold. Centrelink uses different thresholds for singles and couples.
Determining whether you receive a full or part pension reflects the calculations run in both the assets and income tests. Centrelink will derive rates from each test and the lower one is the one that will determine whether you receive a pension and, if so, how much it will be.
Tax experts Robinson Accounting explain the benefits of deeming “they are to help keep your payments steady instead of going up and down based on the performance of your financial assets. Further, they provide an incentive to invest smartly, as any interest rate achieved above the deeming rates doesn’t count as income.”
The Federal Government announced (on 14 July 2019) that both deeming rates would be reduced by 0.75%. This brings the lower rate from 1.75% down to a flat 1%, while the upper rate falls from 3.75% to 3%.
The rate threshold for assets was also set at $52,000 for single individuals and $86,000 for couples.
Before 2019, the last change to the deeming rates was made in 2015. The cash rate has been cut repeatedly since then. The Reserve Bank of Australia brought it down to an all-time low of 1% shortly before the latest deeming rate change.
Bad Credit Loan experts Max Funding understand the importance of making your money work to meet your financial circumstances. They note “with interest rates declining steadily for over four years, many older Australians were concerned by the fact that savings accounts and many other assets were earning less than the deeming rate. The adjusted, lower deeming rates are therefore may be beneficial to the majority of the Australians using them.”
The deeming rate change is not necessarily going to impact every Australian’s finances. The key factor is whether your Age Pension entitlement is being set by your assets or your income.
For individuals whose rate is set by the assets test, the new deeming rates will probably not affect pension eligibility or pension size. Deeming rates have the power to make a change for ageing Australians, especially those who have been denied the Age Pension or are receiving less than the maximum payment due to the income test. For those Australians, the deeming rate change may make a positive difference.
In fact, the new deeming rates may be of great benefit to older Australians who have difficulty meeting their expenses in the current low interest rate financial climate. Many Australians at or near retirement age do not want to take risks with their retirement money.
The acupuncturists at Austin Therapies believe this will help reduce financial pain that many older Australians are feeling. They explain “we see many older Australians who are looking for relief from pain, but who worry about their financial future. Any change to reduce pressure on Australian seniors should be viewed as a positive.”
This is why safe investments like savings accounts and term deposits are popular ways to get an income from investment capital. When defensive assets don’t deliver an income sufficient for living costs, retirees feel pressured to move into growth assets, e.g. managed funds and shares.
The result is an unpleasant situation where individuals are forced to override their risk preferences to meet their income needs.
Hopefully, reducing the deeming rates will allow more Australians to rely on the Age Pension to meet more of their expenses. This will ease the aforementioned issues and allow for older Australians to maintain their current incomes with greater ease without risking their financial future.
Whilst managing retirement finances and trying to maximise all income, there are many factors to consider. The number and complexity of the inputs involved in the process cannot be overstated.
In addition to deemed income and its impact on the Age Pension, you will also have to consider the tax situation attached to your actual income.
Good places to start studying deeming rates, Age Pensions, and other retirement income options include the Centrelink and Moneysmart websites. Financial Information Service (FIS) are found at some Centrelink hubs, which gives you access to an officer to review your situation.
While these resources are informative, they are not set up to provide advice on which options are right for you. Speaking with a professional certified financial planner is always recommended. It is a good way to place your Age Pension concerns in a wider context and ensure you’re on track to reach your retirement goals.
Financial planners can help you plan effectively for a secure income. They can help you ensure your finances endure despite life’s variables, including interest rates, deeming, inflation, superannuation policy, and more.
Do you feel ready to take action now and start planning your finances for when you retire?