6 ways pensioners can beat or equal the deeming rate

Deeming rate method Australian pensioners ETF index fund interest ASX
Deeming is a set of rules used to work out the income generated from your financial assets. It assumes these assets earn a set rate of income no matter what they really earn.

Australia’s pensioners – and particularly part-pensioners – are really angry, and for good reason.

Their assets are assessed using a “deeming method’’ which assumes a certain return, which may have been reasonable when interest rates were hovering around 2.25% but now the rate is quite unreasonable.

For investments under $51,200, assets are “deemed” to be earning 1.75% for single pensioners – for assets above that amount, the deeming rate rises to 3.25%.

Those pensioners who earn below those rates of returns are effectively being penalised and with official interest rates now at 1% and term deposit rates falling, those deeming rates are actually impossible to achieve in a risk-free environment.

They are even difficult to achieve when adding a small amount of risk.

The Morrison Government is one the verge of reviewing the deeming rate and or the rate of the pension but the message is still fairly clear – pensioners and part-pensioners need to take some risks to come closer or even exceed the deeming rates.

So, if we accept that people should take some risks, how can they at least get a bit closer or exceed those deeming rates?

1. Higher yield ETFs

There are a range of exchange traded funds that combine low fees, relatively high yields and usually some diversification across different sectors of the share market.

In a deeming context, these should work quite well, particularly if the pensioner has the ability to “look away” from the overall value of the investment which will rise and fall with the market and focus instead on the higher yield.

Some of the more popular higher yield ETFs include:

It is important to remember that the capital value of these funds can change and may not return to its previous value, indeed some, such as BetaShares Dividend Harvester, effectively are a trade off between capital losses and quite high yield.

Others, such as Vanguard High Yield, are more of a yield focused equity fund which chooses shares with higher dividends.

All of these funds have achieved dividend yields higher than the deeming rates – at times considerably higher – but, as always, come with the very real possibility of protracted periods of poor performance.

2. Real estate for income

Another way of getting increased yield is to become a virtual landlord.

Australian property trusts usually own a mix of industrial, commercial and retail properties which are rented out to a variety of tenants and the shareholder effectively collects that rent – minus costs – in the form of dividends.

There are two ways of buying property trusts, either directly or as through an ETF.

Some of the larger listed property trusts or A-REITS (Australian real estate investment trusts) include:

Some ETFs that provide exposure to a range of listed property trusts include:

In general, the ETFs will be more of a set and forget property exposure while selecting individual A-REITS will allow investors to fine tune and pick between different property sectors.

3. Bond funds

In general government bonds have fairly low yields but are quite safe while some corporate bond funds have higher yields and higher risks. Some of the bond funds include:

4. Listed Investment Companies

Listed investment companies are a good compromise for people who want diversification, strong dividends and a set and forget investment.

Professionally managed and with low fees, they are not immune from share market rises and falls but usually produce good results over time and consistent dividends.

Some of the larger LIC’s include:

5. Traditional index ETFs

Traditional sector ETFs have low costs and reliably replicate the performance of the index they mirror, in this case the ASX 200 or for the Vanguard Fund, the ASX 300.

Some of the broad ASX ETFs include:

6. Enhanced cash, cash and promotional offers

Despite lower interest rates there are still some higher promotional rates out there as long as you can meet the conditions.

One example is the ING savings maximiser which is still offering a total of 2.3% including a bonus rate but only if you deposit $1,000 a month into a personal account and make five or more transactions a month.

There are some similar offers with varying conditions – some expire after a promotional period and others have conditions such as the ING bonus rates.

All of them can cancel the bonus or change conditions at any time so this is far from a set and forget model, but can be useful if the conditions are not too onerous or costly and you are prepared to keep shopping around for the best deal.

Mortgage funds are another higher return alternative but are not government guaranteed and should not be treated like cash in the bank. They are usually not usually suitable for frequent transacting.

Some listed alternatives may be useful for some pensioners, offering enhanced rates or the convenience of good term deposit rates and often monthly income without worrying about rollovers and with access on the usual share market terms of a few days.

Of course, brokerage applies on purchase and sale which is an added cost.

Some of these ASX listed alternatives include:

John is a highly experienced business journalist and formerly chief business writer for the Herald Sun. He has covered Federal politics in Canberra, was Los Angeles Bureau chief for News Limited and was also chief of staff for the Herald Sun. He has covered a wide range of small and large cap ASX stocks and has a special interest in mining, technology and biotech.