It’s been a long time coming, but up to 630,000 retirees could soon enjoy a small but welcome increase in their Age Pension payments following a cut in deeming rates used for the pension income test.
Under the Age Pension income test, you are ‘deemed’ to earn a certain rate of interest on your savings and investments no matter how much income you actually receive.
The federal government announced in July that it will cut the lower deeming rate from 1.75 per cent to 1 per cent for financial investments worth up to $51,800 for single pensioners and $86,200 for pensioner couples where at least one person receives a pension. The upper deeming rate for savings above these thresholds will be cut from 3.25 per cent to 3 per cent.
As a result, Treasurer Josh Frydenberg said single pensioners could be better off by up to $804 a year and couples by up to just over $1,000.
Single pensioners with less than $51,800 in term deposits, and pensioner couples with less than $86,200, are probably earning a better rate of interest than the lower deeming rate of 1 per cent.
Even better off are retirees with money invested in Australian shares (either owned directly or within managed funds or superannuation) where yields have been over 4 per cent. This is significantly higher than the top deeming rate of 3 per cent.
Growth investments such as shares not only provide the opportunity to grow your capital over the long term, they pay regular income in the form of dividends along the way.
It’s understandable that retirees are risk averse and want to protect their capital.
Bank term deposits provide the certainty of capital protection with a reliable income stream. But there is also an argument for diversifying your sources of income once you have covered your needs for ready cash.
If you would like to discuss your investment strategy in the light of changes to deeming rates and your Age Pension entitlements, give us a call.