In this very low cash rate environment I find current deeming rates a real deception and a little bit of sham.
Why you asking? Well... I will answer this question in a minute for you but first we really need to understand
what deeming is, why Government introduced deeming rules, which of the assets are affected by deeming,
who is the most affected and what deeming rates we have right now.
Let me introduce myself my name is Katherine from About Retirement,
I'm Certified Financial Planner
and Retirement Planning is what I do every day.
Every day I speak to retirees, every day I try to help people to either be better prepared for retirement or
improve level of security of income if you already retired,
and what is really a big passion of mine, is get more out of the Age Pension system for you if it is possible.
As you are most likely aware based on your application Centrelink will apply Income and Assets Test to all your assets.
Whichever of those two tests provides a lower pension payment outcome, this is what you're going to get.
So it only makes sense to know in advance which test is the one that you need to improve.
I have many videos that can help you be better prepared: 1. "Age Pension explained"
2. "The truth about Assets Test"
3. and my personal favorite "9 ways to legally hide money from Centrelink Age Pension"
Watch them to improve your Age Pension outcome.
So let's talk about deeming. What is deeming?
Simply explained, it is a unified way how the Government calculates income you are expected to earn from your financial assets.
Deeming is part of Income Test when applying or receiving a pension
from DSS (Department of Social Security) or DVA (Department of Veterans Affairs).
So why does the government use the deeming system?
Apparently those are the following benefits that you get out of deeming rules:
it is a simple and fair way to assess income from financial investments,
it assesses the same level of income regardless of assets you are invested into,
therefore income support payments do not vary just because you hold a different type of asset,
the deeming rate reflects returns that pensioners can get from their savings. This is quite questionable in today's market!
By treating all financial investments in the same way, the deeming rules apparently encourage you
to choose investments on their merit and not only on the effect it might have on your Age Pension entitlement.
It helps to simplify investment choices,
deeming encourages you to consider earning better returns on your investments.
So please remember those last four points I've just mentioned, as this will be our discussion later in this video.
What assets are affected by deeming?
Well virtually total balance of all your financial assets such as all types of bank accounts,
your saving accounts, term deposits, any cash in hand in excess of $500. Did you know that?
Gold and other bullion, and if you have Bitcoin or some other form of cryptocurrency - it's also included.
Managed funds, insurance bonds, loans that you make to other people.
So for example if you lend your family member or friend or an institution, a private company some money - that is subject to deeming.
bonds, debentures, shares, some super funds, some pension funds, some lifetime income streams,
and importantly gifts in excess of allowable limits.
If you don't know gifting limits please watch "Age Pension Assets Test - THE TRUTH REVEALED!"
This is not an exhaustive list but it gives you a good indication of what is considered a financial asset to earn deemed income.
Also I've just listed: some supers, some pensions, some lifetime income streams
therefore it can tell you that the rules can vary between different types of assets and
this is due to ongoing changes in the landscape of retirement income streams in Australia over the years.
This might be a little bit confusing or even frustrating but this is exactly how
professionals specializing in Retirement Planning like myself, can assist you to improve your
retirement income position that could include improvement of Age Pension entitlement as well.
So we spoke about financial assets, what are non-financial assets you might ask.
For example: entry contribution to a Retirement Village, your home contents and your personal belongings,
car, boats, caravans, collectibles, Life Insurance Policy that cannot be cashed out,
private company shares, fully or partially asset exempt income streams - those are under very specific rules,
real estate such as vacant land, holiday house, or farms.
When I mention this I usually get a question whether a rental property is also subject to deeming rules.
Rental property is treated as a financial asset but it is not subject to deeming.
It has its own way of calculating income and I will explain this in a future video that is dedicated fully to Income Test.
Who is mostly affected? And I'm talking here about pensioners
that receive a part part Age Pension that has been reduced under Income Test due to deeming.
Single homeowner with assets between approximately $253,000 and $270,000.
Single non-homeowner with assets between $253,000 and $521,000.
A couple non-homeowners with assets between $443,000 and $645,000.
So if your assets are between those brackets, now you know exactly why you are not receiving full Age Pension.
What are our current deeming rates? I'm recording this in May 2021.
If you are single, the first $53,000 is deemed at 0.25% and the balance above $53,000 is deemed at 2.25%.
If you're a couple, the first $88,000 is deemed at 0.25% and the balance above $88,000 is deemed at 2.25%.
Good luck finding that interest rate from your bank!
The big story that government is selling is that if you earn more than the deemed income rate the extra doesn't count as your income.
So now you know what is deeming, what is the purpose of deeming and why government uses deeming rules,
what assets are affected by deeming, who is affected and what rate we have right now.
So let's go back to my original statement: Why I think the current deeming rates are deception and a little bit of sham?
Originally when deeming was introduced, every bank that provided you with deeming account or pensioner account
was supposed to match deeming rates. Well, this is not happening any longer!
Current cash rates in Australia are lower than deeming rates, hence pensioners are being penalized for market conditions.
If you are a pensioner and you keep money in cash, you are actually penalized twice:
for the first time when you keep money in your bank account and you get close to no return on your savings,
the second time when Centrelink applies higher deeming rates, therefore deeming your income at the rate that you are unable to get from the bank
but still reducing your Age Pension.
In order to earn any income, pensioners as well as self-funded retirees have no choice but to take greater risk
by investing into shares, into managed funds, that should provide a higher income, higher rate of return than deemed rate.
This is not being recognized by the Government, and all the risk, all the hard choices are responsibilities of retirees.
And I really find that extremely unfair.
Risk averse retirees have very hard choice: you either keep money in safe investments such as cash and fixed interest
and suffer the consequences of very low, to no income earned, which often means you have to spend your own capital to survive,
or you accept the investment risk, deal with market volatility, and hope for the best.
This is exactly when this specialized advice is paramount, to find the optimum solution between:
your need for income, asset security, growth of your capital, reduction of volatility,
longevity of your income as well as your capital.
OK, so this is my heartfelt statement as to how I feel about Government's decision about deeming rates,
and now I'm really curious: Do you agree or do you disagree with me?
Please leave a comment below my video and let me know how you feel about it.
If you found this video of benefit please LIKE it
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If you want to get more information check out my other videos, visit my website: AboutRetirement.com.au
and while you're there feel free to download my eBook: "12 PRINCIPLES OF INVESTING"
which will honestly help you with your investing decisions.
Before you leave, I invite you to watch those previously mentioned videos
about retirement and Age Pension
with many ideas how to reach better financial outcomes from your money.
The second lot of videos cover superannuation and strategies
to improve the long-term benefit of your retirement.
See you next time.