Guide to deeming
- What is deeming?
- The current rates
- How deeming works
- Monitoring the deeming rates
- Financial institutions
- General availability of deeming rates
What is deeming?
The deeming rules are a central part of the social security income test. They are used to assess income from financial investments for social security and Veterans' Affairs pension/allowance purposes. Deeming assumes that financial investments are earning a certain rate of income, regardless of the amount of income they are actually earning. If pensioners earn more than these rates, the extra income is not assessed.
The main types of financial investments are:
- bank, building society and credit union accounts and term deposits
- managed investments, loans and debentures, and
- listed shares and securities.
Deeming is a simple and fair way to assess income from financial investments, as:
- customers with the same amount held in different financial assets receive a similar assessment
- it reduces the extent to which income support payments fluctuate
- it increases incentives for self-provision because returns above the deeming rate are not counted as income, and
- it simplifies choice of investments-it encourages customers to choose investments on their merits.
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The current rates
Currently a deeming rate of 2 per cent applies to the first:
- $48,000 of a single customer's total financial investments
- $79,600 of a pensioner couple's total financial investments
- $39,800 of total financial investments for each member of an allowee couple.
A deeming rate of 3.5 per cent applies to financial investments above these amounts. The thresholds at which the higher deeming rate begins to apply are indexed in line with the CPI in July each year.
How deeming works
Investment decisions should be made taking into account the person's full circumstances. All pensioners and allowees will want to hold some savings that they can access easily. However, as their savings increases, they can also be expected to have a more diverse portfolio of investments earning higher returns. Many safe and readily available financial products will provide returns the same as or greater than deeming rates.
The lower deeming rate reflects that many pensioners will generally choose to have some savings in investments with very high accessibility and safety, but which tend to provide relatively low returns.
The higher deeming rate reflects that customers with higher amounts of savings seek higher returns on some of their savings, either by maintaining higher balances, accepting relatively lower accessibility (for example term deposits) or by accepting some more risk (for example shares).
The deeming rules create incentives for investors to earn more income from their savings. If pensioners and allowees respond to the deeming rules by investing to get higher returns, their total income will increase. The introduction and application of the deeming system has led to an increase in the total income of the pensioner population.
Deemed income is calculated by multiplying the total value of a customer's financial investments by the deeming rates. Deemed income is then added to any other income (for example rental income). The taper rate is then applied (50 cents in the dollar), in order to work out the customer's payment under the income test.
Single pensioners whose only source of income is from financial investments can have up to $139,425 in financial investments ($245,085 for pensioner couples) and still receive the full pension under the income test. This is because of the income test free area. The pension income test benefits all pensioners. The income test is designed to encourage people to supplement their income support payment with private income.
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Monitoring the deeming rates
The deeming rates are monitored on an ongoing basis. Any changes made to the deeming rates are usually made to coincide with the indexation of pensions, to reduce disruption to pensioners by minimising the number of changes to their payments.
Changes are only made if analysis of a range of relevant factors that determine the deeming rates indicates that a change is appropriate. However, changes can be made at any time if there are very significant movements in the factors taken into account.
The Australian Government's policy is that it should not regulate the terms and conditions of bank accounts; rather, it seeks to ensure that competition between banks and financial institutions, such as credit unions and building societies, results in customers being able to shop around for the banking products that meet their needs.
Financial institutions decide the interest rates they offer on their various accounts. Decisions about fees and interest rates charges represent commercial decisions taken by financial institutions in the context of a very competitive marketplace. While many financial institutions link the interest rates on accounts offered to seniors to generally reflect deeming rates, this is a result of market forces applying to financial institutions to retain customers, not at the direction of government.
General availability of deeming rates
Returns equal to or higher than the deeming rates are available on a wide range of conservative investments such as at-call accounts, term deposits, cash management accounts, and Internet-based savings accounts. Many of these accounts may pay more than the deeming rates while retaining the accessibility that many pensioners need.
However, conditions for these accounts vary according to the financial institution offering them, so it is important that customers first talk to their financial institution when choosing these products. If customers are still unsatisfied, they can shop around financial institutions for the account that best satisfies their needs.