Nick Bruining: No news on Centrelink’s deeming rates freeze is good news for part-pensioners ... for now

While means test thresholds will increase from July 1, there’s still no news on the vexed question of changes to Centrelink’s deeming rates.

Deeming rates are set by the Minister for Social Services, Tanya Plibersek, and have traditionally taken into account prevailing market rates.

A reset to “normal” deeming rates could see some seniors losing more than $2500 a year in pension payments.

The rates are used by Services Australia to calculate the various entitlements paid by Centrelink. They are used for all income support payments, including pensions and allowances.

In the midst of the COVID-19 pandemic, the deeming rates were frozen at historically low levels to allow more Australians to access higher Centrelink income support payments. In the heat of the 2022 Federal election, that freeze was extended to end on June 30, 2024.

A further 12-month extension to June 30 this year was added in the 2024 Federal Budget.

“Deeming rates are a notional rate of interest applied to all financial investments, rather than the actual income generated by the investment concerned,” said Colonial First State technical services manager Craig Day.

Centrelink ignores bank interest, dividends and all payments from conventional superannuation funds including super withdrawals and payments from most account-based pension funds.

Instead, after July 1 Centrelink will continue to deem the first $64,200 of all financial investments for a single to be earning just 0.25 per cent a year. All financial investments above this amount are deemed to be earning 2.25 per cent.

Financial investments include all bank accounts, cash, managed investment funds, super funds (if over age pension age), gifts over certain limits, and bullion.

For example, a single pensioner with $100,000 in the bank, a share portfolio worth $100,000 and an ABP worth $100,000 would have financial investments of $300,000.

The deemed annual income on this amount would be $5466 a year, and that’s then divided by 26 to give a fortnightly amount. That figure is applied against the fortnightly income test. In this example, deemed income would be $210.23 a fortnight.

In this case, the single pensioner would be entitled to the maximum payment of $1149 a fortnight.

For couples, the lower deeming rate of 0.25 per cent will apply to the first $106,200 of financial investments from July 1, with the 2.25 per cent applying to the remainder.

Mr Day said deeming rates had, historically, roughly tracked the Reserve Bank’s overnight cash rate.

“In August 2016, the cash rate was at 1.5 per cent with the lower deeming rate set at 1.75 per cent, and the higher deeming rate was at 3.25 per cent,” he said.

“But in 2004 when the cash rate was at 5.25 per cent, the deeming rates were 3 and 5 per cent, respectively.”

With the RBA cash rate currently at 3.85 per cent, deeming rates of, say, 2 per cent and 4 per cent are not out of the question.

If that were to happen, the deemed income for our single in the example above would jump from $210.23 a fortnight to $412.15, resulting in a $97.08-a-fortnight reduction from the full rate of age pension. Over a year, that works out to be more than $2500.

It has been estimated that if the deeming rates were aligned to the current RBA overnight cash rate, up to 460,000 Centrelink customers could be affected.

A spokesperson for Ms Plibersek said a decision on deeming rates had not been made.

“Any decision we make will be fair for age pensioners” said the spokesperson.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association