When deeming was introduced about 18 years ago, something unusual happened.
The government of the day expected that this change would generate a large amount of contact from people trying to understand how they would be impacted. But the exact opposite occurred.
Very few people asked for additional information or assistance. Retirees and others who were to have their assets deemed (such as disability pensioners) seemed to understand what deeming is and the impact it would have on them.
Therefore, a good place to start is to accept that deeming isn’t hard to understand.
Deeming applies to bank accounts, managed funds, term deposits, shares and some other investments. It assumes your investments earn a certain amount of income under Centrelink’s income test. If you earn more than the assumed earning rates, then the additional income isn’t counted under the income test.
Currently if you’re single, the first $46,600 of assets are deemed to earn 2% each year. For pensioner couples, the first $77,400 is deemed to earn 2% per annum. Any assets above these limits are deemed to earn 3.5% per annum.
The government adjusts these deemed rates of return, based on prevailing market conditions. The assumed rates of return were most recently updated in early November. The thresholds are indexed each 1 July.
The big change is that deeming will now also apply to all superannuation pensions that commence after December 2014.
How are pensions assessed before 2015?
Under current rules, Centrelink (or Veteran’s Affairs if you’re a veteran) takes your pension’s purchase price (I’ll use $300,000 as an example) and divides it by your current actuarial life expectancy. Males aged 65 currently have a life expectancy of 18.54 years. Females of the same age have a 21.62-year life expectancy.
The result of this calculation is called your pension’s deductible amount or DA. In our example, the deductible amount is $16,181 if you’re male and $13,876 if female.
The amount of income counted by Centrelink is the income paid from your pension less the deductible amount. If your pension paid you 5% of the account balance as income, or $15,000, and you’re male you would have no income counted for Centrelink’s income test ($15,000 less $16,181). Females would have just over $1,100 counted.
For most people, as their age increases and their minimum pension increases, the amount of income counted under this test also increases.
Deeming rules after 2014 – males to loose a small advantage
Under current rules, males (because they live shorter lives on average) get a small advantage because less income is counted under the Income Test.
This is lost under deeming because it applies to both sexes in the same way.
Taking the $300,000 pension as an example and no money in the bank, then applying deeming will see a single person have $9,801 (or $377 per fortnight) counted as income under the income’s test (2% on the first $46,600, 3.5% on the balance of $253,400).
A couple would have $9,339 ($359 per fortnight) counted towards their income test.
Note that the amount counted won’t change because of your age, as occurs under the current rules. This means you can take whatever income you like from your pension and it will have no impact on the pension’s income test assessment.
No change if impacted by assets test
If your pension is reduced because of Centrelink’s assets test, then this change won’t alter how your aged pension is determined. If you are ineligible for a pension under the assets test, then this change won’t have any further impact on you.
New Australian life tables before 2015?
It’s possible that before the end of 2014, the Australian Government Actuary might issue 2010/12 Life Tables. At this stage, we don’t know when the tables will be published but it’s expected to be in the next 12 months or so. If they’re published before 2015, they would apply to Centrelink pensions that commence between their date of issue and January 2015.
The new life tables will undoubtedly show that we’re all living longer. The bottom line impact is that your deductible amount will be lower than if the current rules are applied, meaning that more income might be counted under the income test.
For example, suppose that there is a 10% increase in life expectancies. In this case, a 65-year-old male would be expected, on average, to live for another 20.39 years. Taking our example above, the deductible amount would be $14,713.
Current rules versus deeming
There are many issues to consider here.
Looking at our example above and assuming the 2005/07 Life Tables continue to be used, a single male would need to be taking a pension of almost $26,000 a year to have the same amount of income counted under the current income test, as will apply under deeming.
This is an income payment of about 8.6% of a $300,000 account balance. Retirees aged older than 85 need to take at least 9% income from their super pensions.
From this very simple case study, I conclude that if you intend to take the minimum pension payment and you aren’t going to be impacted by the assets test, it might be a good idea to lock in your Centrelink income test assessment approach before 2015.
I suggest you should seek some advice. If you don’t use a financial adviser (and don’t wish to use one) then Centrelink provides a Financial Information Service. It’s a free service and you can contact them here [1].
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Margaret Lomas – My SMSF – Property guru Margaret Lomas [2]
- Penny Pryor – ASIC promises equal scrutiny [3]
- Charlie Aitken – Australian banks still on hold [4]
- Staff Reporter – Buy, Sell, Hold – what the brokers say [5]
- Ron Bewley – What not to buy [6]
- Questions of the week – Monadelphous and SMSF estate planning [7]