Pensioners Need to Rise to a New Challenge

The good news for age pensioners is that they should be up to the challenge of outperforming the new deeming rate.

The bad news is that they don’t have a choice–if they don’t outperform the new rate, their standard of living will fall.

It is important here to understand a little bit of history, which saw the deeming rate on pensioners assets reduced due to the COVID pandemic.

Five Years of a Really Low Rate

That deeming rate of just 0.25% held steady for an amazing five years but Social Services minister Tanya Plibersek is increasing it to a more challenging 0.75% from July 1.

With interest rates falling at the moment some pensioners may be concerned that they won’t be able to rise to the challenge of meeting or beating the deemed rate for their financial investments of 0.75%.

However, it is not such a difficult task depending on the level of risk that the individual is prepared to take on.

The change will affect every individual pensioner differently depending on the level of their financial assets, but the general rule of thumb is to aim to exceed the deemed rate of return by as much as you possibly can to increase your standard of living.

Deeming Rates Should Be Viewed as a Challenge

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.

Instead of requiring pensioners to provide their actual earned income on financial investments, a deemed rate is applied.

By moving the deeming rates higher, Tanya Plibersek is returning the concept to one that more closely approximates where interest rates on savings accounts actually sit rather than a concessional rate that can be easily beaten.

However, despite the rise it should not be too difficult for the average person on the age pension to beat the new deeming rate, hopefully by quite a large margin.

Any extra money earned above the deeming rate remains in your pocket, so it is highly desirable to rise to the challenge of beating the deeming rate.

Some Options to Make Sure You Are a Winner

The first and most obvious port of call 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.

As I covered here, banks and financial institutions have been putting a lot of hoops and hurdles in the way of savers getting access to their advertised high interest rates.

So it is important to closely examine any of these barriers and make sure that you can consistently earn the highest rate.

Leaving the cash in a conventional savings account is not a good option because most banks pay a derisory amount of interest on these accounts.

Comparison websites currently show quite a number of high interest savings accounts paying greater than 4%.

These are a really good way of beating the deeming rate and earning a higher standard of living.

Cash ETFs a Longer-Term Answer

Another less conventional 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 any have those pesky hurdles such as increasing the amount in the account every month or time limits for the highest rate.

A couple of examples would be Betashares cash ETF (ASX: AAA) and for slightly more risk but a greater return Betashares subordinated debt ETF (ASX: BSUB).

Being share market investments, the obvious downside is that to access the capital you need to pay brokerage so this approach is only really appropriate for those who want a long-term answer to getting a high interest rate without having to shop around and are not intending to access their capital a lot.

Obviously, there are many other financial investments that may be appropriate for those on the age pension, depending on how comfortable they are with taking risk, including investments in bond funds or listed investment companies such as Australian Foundation Investment Company (ASX: AFI) or Argo (ASX: ARG)or ETFs that cover major market indexes  such as the ASX200.

Such investments will yield reasonably strong dividend income, usually fully franked, which should also comfortably outperform the new 0.75% deeming rate, although obviously being made up of investments in underlying companies listed on the share market, the capital value will fluctuate with market movements so this is not an alternative for the faint hearted to consider.

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.

Another potential option would be to invest in real estate investment trusts either directly or through a property ETF, which should also produce strong dividend income along with the same caveat about the unpredictability and long-term nature of listed investments.

Don’t Get Upset, Get Even

While some age pensioners will be upset by the new deeming rate after years of not having to worry about it, it is much more productive to not get angry but to get even or better than even by aiming to beat that rate with your investments by as much as possible.

While the challenge of beating the deeming rate has just got slightly harder, it is still very achievable by anyone.

The worst approach would be to simply leave your money sitting in a bank account that earns negligible interest.

That is a recipe for a lower standard of living than you may have enjoyed before.