The Department of Human Services (DHS) uses what’s called ‘means testing’ to calculate the rate of Age Pension entitlement and eligibility of Australians. In other words, the value of assets you own affects whether you can get an Age Pension and how much you can get. Your income can reduce your pension too. DHS applies the income and assets test to each pension applicant and adopts which ever test results in a lower pension entitlement payable. These tests are important to make sure the system is as fair as possible (easier said than done).
The Reserve Bank’s recent interest rate cuts have put older Australians directly in the firing line. This is especially the case for those who receive an Age Pension which is determined by the income test, due to what’s referred to as ‘deeming rates’.
What is the income test and deeming rates?
If you’re a member of a couple and at least one of you get a pension, the first $86,200 of your combined financial assets has the deemed rate of 1.75% applied.
For example, let’s assume a savvy Age Pensioner has $80,000 fully invested and is earning a 6% income rate of return. Under the deeming rules, DHS will use a maximum of 1.75% of income when calculating the level of pension payable. The surplus income of 4.25% is money in your pocket and not assessable. Seems like a great deal, right?
The issue is that with the cash rate now at 1%, anyone who has money tied up in savings accounts or term deposits is likely not making anywhere near 1.75%, so they’re having their pension payments unfairly reduced and are living off less money.
The solution is not an easy one. The current deeming rates were set by our PM, Scott Morrison in 2015 in his former role as Social Services Minister. At the time, the cash rate was around 2.25%; more than double where it is today! Not surprisingly, Labor is lobbying for an urgent reduction in the deeming rate to help pensioners in the current ultra-low interest rate environment. Analysis by Labor shows matching the five interest rate reductions over the past four years (1.25 percentage points) would see some single non-home-owning pensioners more than $3,000 better off, while couple homeowners would see up to an extra $1,850. This much-needed boost to retirees (who have largely missed out from the benefits of the Coalition's $158 billion tax package passed last week) would cost at least $1 billion a year and eat into the Coalition’s forecast surplus.
This issue is now in the hands of the Government’s expenditure review committee which will no doubt result in an ongoing debate. If you’re already a Hewison client, you’re probably not impacted by the above deeming issue given the strong income we generate for you from your diverse and relatively conservative portfolio. However, I do feel for the almost 1 million other Australian pensioners who have inadvertently been impacted by the Reserve Banks’ attempted economic stimulus. Let’s hope a fair and rational solution is passed as soon as possible.
Hewison Private Wealth is a Melbourne based independent financial planning firm. Our financial advisers are highly qualified wealth managers and specialise in self managed super funds (SMSF), financial planning, retirement planning advice and investment portfolio management. If you would like to speak to a financial adviser on how you can secure your financial future please contact us 03 8548 4800, email email@example.com or visit www.hewison.com.au
Please note: The advice provided above is general information only and individuals should seek specialised advice from a qualified financial advisor. The views in this blog are those of the individual and may not represent the general opinion of the firm. Please contact Hewison Private Wealth for more information.