- 01Sep 20: deeming 1.25% up to $64k/$106k; 3.25% above.
- 02Indexation adds $4b; beat deeming with savings.
- 03Shop around for 5%+ savings or term deposits; avoid low rates.
Psychology plays a big part in how people feel about coping with change.
Which is why age pensioners and some other welfare recipients need to see the latest change to the deeming rate as a challenge to be conquered rather than a burden.
From September 20, there are two rates that need to be borne in mind:
The lower deeming rate of 1.25% for financial assets up to $64,200 for singles and $106,200 for couples combined.
The upper deeming rate of 3.25% for financial assets above these thresholds.
On the same date the new rates apply, age pensioners will receive an indexation rise, which adds up to a total of $4 billion, so the challenge now is to make sure that they at least match and hopefully better these deeming rates with their savings to keep their standard of living as high as possible.
Three Rises Since COVID
The rise in the deeming rates is the third successive rise since the ultra-low Covid era of just 0.25%, which held steady for an amazing five years.
The Australian Government Actuary calculated the new rates, which the government has accepted.
Thankfully, the new rates are not too challenging to match or improve on, so it is a great chance to keep your standard of living as high as possible.
It is important to note that there is no penalty for scooping up more interest or other investment income than the deemed amount, so there is no need to hold back and you can go for the highest rates available—pending the usual safety checks, of course.
Deeming is a process used by the government to calculate a uniform return on financial investments—such as savings accounts and term deposits—to simplify income rates when calculating pensions.
It is applied instead of requiring pensioners to provide their actual earned income on financial investments.
Make Sure You Are a Winner
The first and most obvious way to beat the deeming rate is to earn the highest interest rate possible using either a term deposit or high interest savings account while allowing enough of a cash buffer in a more conventional bank account to meet other expenses.
That should be reasonably easily achieved, although there are many traps that have been laid by banks and financial institutions in the form of hoops and hurdles in the way of savers getting access to the advertised high interest rates.
It is important here to make sure you can jump through these hoops or get access to a product that has no such hurdles.
Shopping around for the combination of the best rate and the fewest or most easily met hurdles should be the aim, and it is important to cast the net much more widely than simply remaining loyal to your current bank or financial institution.
Leaving cash in a conventional savings account except for the at call amount is usually not a good option because most banks pay a derisory amount of interest on these accounts.
Comparison websites currently show quite a few high interest accounts earning above 5% and also term deposits above 5% as well—all of which should comfortably beat the new deeming rates.
Cash ETF Alternative
A less conventional and slightly “lazy” way of ensuring that you can consistently beat the deeming rate is to buy shares in a cash ETF that will usually pay interest monthly and doesn’t come with pesky conditions and hurdles such as increasing the amount in the account every month or time limits for the highest rate.
A couple of examples include Betashares Cash ETF (ASX: AAA) and for slightly more risk but a greater return Betashares Subordinated Debt ETF (ASX: BSUB), which buys subordinated debt from the large banks.
Obviously having cash as a share market investment has a downside, being the time needed to access capital (at least three days) and the payment of brokerage on the way in and out.
That makes this approach best for those who want a long-term, “hands free” answer to getting a high interest rate without having to shop around and are not intending to access their capital a lot.
Look for Growth Assets
Over the longer term, many age pensioners might also want to keep a portion of their savings in growth assets, depending on how comfortable they are with taking on extra risk.
This might include investments in bond funds, listed real estate investment trusts, index or high income ETFs, or even listed investment companies such as Australian Foundation Investment Company (ASX: AFI) or Argo Investments (ASX: ARG).
Such investments should yield reasonably strong dividend income, often fully franked, which should keep up with the deeming rate.
Because these are made up of investments in underlying companies listed on the share market though, the capital value will fluctuate with market movements so this is not an alternative that will suit really cautious age pensioners.
It is also not really suitable as a source of “at call” money, given brokerage costs and the longer-term nature of share market investments.
However over that long term, the combination of strong dividends and some capital growth will probably be superior to any return from cash.
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