If you currently receive (or intend on receiving) an age pension or various other forms of government income, deeming will likely apply to you. It can influence how much you are eligible to receive, so it's an important concept to get your head around.

What are deeming rates?

Deeming is how earnings from financial assets are estimated to determine your eligibility for government payments. It applies to anyone receiving government benefits, most prominently the age pension, but also including the service pension, veteran payments and income support supplements. 

The age pension is income tested, which means if you earn money elsewhere, be it from superannuation or employment, it affects how much you can receive from the pension. When people hold financial assets like term deposits or shares, deeming rates are used to estimate an annual rate of income you receive from these assets, regardless of how much you actually earn. This works both ways - some years you might be dismayed at being deemed to have earned more than you actually did, while other times your earnings will exceed what you've been deemed as earning. 

Deeming can be useful as it makes your payments consistent instead of fluctuating based on your assets' performance. It might also be less hassle compared to declaring your actual earnings to the government every year.

Financial assets

Financial assets for the purposes of deeming might include:

  • Term deposits 
  • Savings accounts
  • Securities (for example shares or bonds)
  • Certain superannuation income streams

When deeming applies

Deeming applies to anyone receiving government payments and benefits, such as the:

  • Service pension: Granted to veterans on the grounds of age or invalidity, their eligible partners, and widows and widowers
  • Veteran payment: Interim financial support to veterans who have lodged a claim for a mental health condition and are incapable of working more than eight hours per week
  • Income support supplement: A regular income for war widow(er)'s with limited means or a wholly dependent partner
  • Age pension: Income support for Australians 66 years and older
  • Commonwealth Seniors Health Card (CSHC): For those not receiving any of the above, and are either a veteran, widow(er), or above 60 years of age, the CSHC card entitles the holder to concessions in the health sector

Age pension deeming rates

As of June '24, these are the current deeming rates in Australia:

  • For single people, assets valued up to $62,600 are deemed to return 0.25% per year. The portion of your financial assets above $62,600 are deemed at 2.25%.
  • For couples, the first $103,800 of both of your combined financial assets has the deemed rate of 0.25%, with anything above at 2.25%.

How deeming works

To work out your deemed income, the Government takes the total value of your eligible financial assets and applies the deeming rates. This deemed income is then used to determine how much of the age pension you are eligible to receive. For most pensioners (there are slightly different rules for transitional rate pensioners) individuals can earn up to $212 per fortnight ($5,512 per year) without having their pension reduced, but every dollar over $212 reduces the pension by 50 cents. 

Couples can earn a combined income of $372 per fortnight ($9,672 annually) without impacting their pension payments. Every subsequent dollar reduces the pension payment 25 cents.

Case Study: Doris

Doris case study

Let's use Doris, a single 74-year-old who loves red wine and Hugh Jackman, to demonstrate how this works. She's got $20,000 in a term deposit, shares currently valued at $10,000 and an eligible superannuation balance of $35,000.

Doris's total financial assets come to $75,000

  1. The first step is to calculate her deemed income up to the deeming threshold of $62,600, using the lower deeming rate (0.25%): $62,600 x 0.0025 = $156.50
  2. The second step is finding out how much money Doris has over the threshold, by subtracting the deeming threshold from her total financial assets: $75,000 - $62,600 = $17,400
  3. The third step is calculating her deemed income on this amount over the threshold, using the higher deeming rate (2.25%): $17,400 x 0.0225 = $391.50
  4. The fourth step is adding both the deemed incomes, which will give us Doris' annual deemed income: $156.50 + $391.50 = $557

Doris's annual deemed income is $557, which is well below the full pension annual income threshold of $5,512 and would allow her to collect the full pension amount without reduction. 

Case study: Boris and Sheila

Now let's look at how deeming can reduce your age pension payments. Boris and Sheila are a retired couple who have accumulated an extensive range of financial assets over the years.

Their total combined financial assets come to $650,000

  1. The first $103,800 of their assets are deemed at the lower rate (0.25%): $103,800 x 0.0025 = $259.5
  2. Their wealth above this threshold is $546,200
  3. Deemed income on this amount is $546,200 x 0.0225 = $12,289.50
  4. Their total annual deemed income is $259.50 + $12,289.50 = $12,549. This is approximately $483 per fortnight.
  5. This is around $111 above the full pension threshold for couples. Every fortnightly dollar above the threshold means a reduction of 25 cents on their combined age pension, which will be reduced by $111 x 0.25 = $27.75 per fortnight.

Savings.com.au two cents

Deeming rates were devised partly to incentivise pensioners to invest rather than trying to maximise their pension by minimising their actual income. By earning a higher rate of income than the maximum deeming rate, you can essentially earn bonus income that isn't assessed in the income test for the age pension.

With today's low deeming rates combined with the decade-high cash rate, some people might find it worthwhile to consider stashing cash in a bank offering senior savings accounts or term deposits that pay more than 2.25% p.a. in interest.

If you're willing to take on a higher degree of risk, you may also be able to earn a higher income yield by investing in riskier asset classes such as shares, bonds or property. Investment funds such as ETFs (exchange-traded funds) can be an easy low-cost way of gaining exposure to a diversified portfolio of such assets.

Investing can generate an annual dividend at a rate that is higher than what could ordinarily be earned in a savings account or term deposit. Not to mention, there's a potential for long-term capital gains. Consider consulting a qualified financial adviser to discuss your options.        

This article was first published by Alex Brewster on February 22, 2021

Photo by Raj Eiamworakul on Unsplash