Most social security payments in Australia, including the age pension, are subject to both an assets test and an income test. The more assets and income a pensioner has, the lower their pension, eventually reducing to zero. A pensioner’s situation is assessed under both tests and whichever test results in the lowest payment applies.
Deemed income
When it comes to investment income, the income test can be a bit confusing. That’s because it doesn’t use the actual income generated by investments. Rather, the government “deems” that financial assets earn a particular rate of return. This makes life easier for pensioners as they don’t have to track interest payments, dividends or distributions from each of their investments.
How much those investments are deemed to earn differs for couples and individuals.
For a single pensioner, the first $51,800 of financial assets are deemed to earn 1% p.a. Anything over $51,800 is deemed to earn 3% p.a.
For a couple where one or both receives a pension, the 1% deeming rate applies to the first $86,200 of financial assets, with the 3% rate applying to anything above this amount.
These deeming rates apply from 1 July 2019 and are 0.75% lower than the old rates. They reflect the decrease in official interest rates since the last change in March 2015, which in turn have resulted in a reduction in most term deposit and bank account interest rates.
The reason for the two different deeming rates is that it is assumed that pensioners with higher levels of financial assets are likely to invest more of their savings in higher earning investments such as shares and property.
What’s the impact?
For a single pensioner with $250,000 in financial assets their deemed income drops from $8,339 p.a. to $6,464 p.a., a reduction of $72.12 per fortnight. This should result in a pension increase of $36.06 per fortnight.
For a couple with financial assets totalling $400,000, their deemed income drops from $13,276 p.a. to $10,276 p.a., or a reduction of $115.38 per fortnight. This will increase their pension by $57.69 per fortnight.
It’s important that pensioners understand that the reduction in deeming rates does not affect the actual income produced by their investments. In fact, actual earnings in excess of deemed income put a little bit of icing on the pension cake.
Who is affected by this change?
A reduction in deeming rates affects part-pensioners provided it is the income test that determines their benefit. They will see an increase in their fortnightly pension.
It’s also a good thing for people who, under the previous deeming rates, just missed out on a part pension as a result of the income test. They may now qualify for a part pension.
If deeming rates increase, the opposite applies. Part pensions will be reduced, and some pensioners may lose their pension entirely.
Time for a review?
Anytime there’s a change in deeming rates is a good time to review your age pension. Your financial adviser will be able to look at your situation and help you make the most of your pension.