Nick Bruining: Deeming rate changes and return to ‘normal’ levels set to wipe out Centrelink part pensions

A lift in deposit rates coupled with the “normalisation” of Centrelink deeming rates will spell bad news for thousands of income-tested part-pensioners, allowance recipients and Commonwealth Seniors Health Card holders. A 0.5 per cent rise in deeming rates announced last Friday results in a double whack for those affected and will see many fortnightly payments reduced or cut altogether. The change will lift the lower deeming rate from the current level of 0.75 per cent to 1.25 per cent. The higher deeming rate also increases by half a percentage point from 2.75 per cent to 3.25 per cent. The lower rate applies to all financial assets held by a single Centrelink income support client up to a value of $64,200. For couples, the lower rate applies to the first combined $106,200 of financial assets. In both cases, the higher rate of 3.25 per cent will apply to balances above these thresholds. Financial assets include all bank accounts, cash, shares, managed investments, bullion, account-based pension funds and super accumulation funds for those over age pension age. The value of gifts over the gifting limits are also included for five years from the date of the gift. Previously, deeming rates were effectively set at the discretion of the Minister for Social Services. A policy change in December now means the Australian Government Actuary makes recommendations to the minister on the appropriate deeming rate to apply. The move to normalise deeming rates was a political decision made last year. It followed a three-year freeze on deeming rates — an emergency measure taken when the COVID-19 pandemic first appeared. Effectively, this normalisation step coincides with the hike in the Reserve Bank’s official cash rate following Australia’s red-hot inflation figure for the December quarter. While the Minister for Social Services, Tanya Plibersek, said on Friday that an expected increase to age pensions in March would minimise the effect, thousands of income-tested part-pensioners face having their pension cut off. Many full pensioners may see their pensions clipped for the first time. A single age pensioner this time last year could have about $308,000 in financial assets without losing any pension. From March, even with the expected pension increase, that figure drops to about $215,000. Above this limit and the pension would be reduced by the effects of the income means test because deemed income would exceed the allowed $218 a fortnight. CSHC holders are also at risk, thanks to a hybrid method of calculating assessable income. Centrelink takes adjusted taxable income for all sources and adds the deemed income on income stream investments such as ABPs. In this case, the actual payments from an ABP are ignored. A single, self-funded retiree with $1 million in an ABP would see the deemed income rise from the current level of $26,216 to $31,216 a year, and a couple with $1m each from $52,876 to a combined amount of $62,876 a year. Following the end of the COVID-19 freeze on Centrelink deeming rates last September, Ms Plibersek made it clear that the 0.25 per cent rise in deeming rates then was the start of a process to “normalise” deeming rates. “The Government will now gradually return deeming rates to pre-pandemic settings — that is, to reflect rates of return that pensioners and other payment recipients can reasonably access on their investments,” she said at the time. By way of comparison and before the pandemic, the last time the RBA cash rate sat around the 3.85 per cent level was in May 2012 when it was 3.75 per cent. At that time, the deeming rates sat at 3 per cent and 4.5 per cent a year. That means further increases to the deeming rates are likely to continue when they are next reviewed in September. A return to the 2012 levels would see thousands of additional part-pensioners and CSHC holders using ABP funds also affected. Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association