Deeming is a key concept in the income test to be met to access the Aged Pension. This is in addition to passing the assets test, being age-eligible, and qualifying as an Australian resident. But it does have some hidden benefits.
Deeming is used by the Department of Human Services (via Centrelink) to nominate a certain annual rate of return on your investment assets, regardless of the rate of return you are earn.
It makes it helpful to you and the government because paperwork is reduced to a minimum. Changes in returns from your investments do not have to be recorded and reported. It lets you focus on investing for your own needs and not be concerned about changes affecting pension payments.
The rates are set by the Minister (eg the can change say year on year) and there are different rates for different life situations. Deeming rates apply to:
- Account-based superannuation income streams or pensions
- Savings accounts and term deposits
- Managed investment schemes
In the current low-interest rate environment, the once popular special deeming accounts are few and far between.
The rates as of July 1, 2018 are:
- If you’re single: The first $51,200 of your financial assets has a deemed rate of 1.75% applied. Anything over $51,200 is deemed to earn 3.25%.
- If you’re a member of a couple and at least one of you receive a pension: The first $85,000 of your combined financial assets has the deemed rate of 1.75% applied. Anything over $85,000 is deemed to earn 3.25%.
When the deeming rate for your life situation is lower than real investment returns there is an incentive to earn higher than the deeming rate on your investments, because the excess amount isn’t counted in the income test.
The concept is straightforward, the calculations simple and it offers the investing recipient of the Age Pension the opportunity to be more flexible in choosing suitable investment options without worrying about higher and frequently changing investment returns.