Benefits for Centrelink customers

Deeming is a set of social security rules used to assess income from financial assets. Under these rules, Centrelink assume that financial investments are earning a certain amount of income, regardless of the income they actually earn.

Deeming is used by social security as a way to calculate your level of investment income for the purposes of calculating the amount of pension, benefit or allowance you will receive.

What are financial investments?

Financial investments commonly include, but are not limited to:
• Bank, building society and credit union accounts
• Term deposits and debentures
• Managed Investments
• Superannuation for clients over pension age
• Insurance bonds
• Listed shares and securities
• Shares in unlisted public companies
• Loans including those to family trusts and companies
• Gifts of money or other assets over allowable gifting limits.

Current interest rate trends

As you would be aware, the trend in interest rates has been downwards since September 2008 with the Reserve Bank of Australia (RBA) cutting interest rates 5 times since September 2008. This has resulted in a 4% reduction of the RBA cash rate from a high of 7.25% to the current level of 3.25%.

Given that interest rates have been coming down, Centrelink has also reduced its deeming rates downwards.

1. Prior to 26 January 2009, the deeming rates stood at 3% and 5%;
2. Currently the deeming rates are at 3% and 4%; and,
3. The Government has recently announced that they propose a further reduction to apply from 20 March 2009, to 2% and 3%.

What does this mean for you?

A reduction in deeming rates generally means that Centrelink assesses a lesser amount of income from financial investments.

So, with the deeming rates dropping, Centrelink recipients who receive a reduced rate of pension or allowance as a result of the income test are likely to have seen their level of pension increase.

Example

Consider Glenda (64) and Bob (71), both receiving part Age Pension.

They have $200,000 in a term deposit, which (as a financial investment) is being subject to deeming. The deemed level of income that they are assessed as receiving from this term
deposit results in a reduced rate of pension because this income is higher that the income test limit.

Let’s look at how the reduction in deeming rates would have impacted on their Age Pension entitlements.

Prior to 26 January 2009

Deeming rates prior to 26 January 2009 were as follows:
• 3% for the first $68,200 in financial investments; and
• 5% for amounts over $68,200.

With $200,000 in financial investments, they would have been deemed to earn $8,636 a year from this term deposit (regardless of how much it is actually earning).

As a result, their Age Pension entitlements would have been $457 per fortnight each, or a combined annual total of $23,768.

Between 26 January 2009 and 20 March 2009

The above deeming rates were adjusted downwards from 26 January 2009 to 3% and 4% respectively. As a result of this reduction, Glenda and Bob’s deemed level of income for Centrelink purposes would have reduced to $7,318 a year.

In turn, their Age Pension entitlement would have increased to $467 per fortnight each, or a combined annual total of $24,295.

From 20 March 2009

Deeming rates are set to fall further to 2% and 3% from 20 March 2009.

The good news for Glenda and Bob is that due to this reduction in deeming rates, they will only be assessed as having income of $5,318 a year. This is below the allowable income test limit and means that for the first time, they will be eligible for the full rate of Age Pension. This equates to $475.50* per fortnight each, or a combined annual total of $24,726*.

If you would like to find out more about deeming rates or to discuss how these changes will affect you, please call us.

* Based on rates current to 19 March 2009.


Important information
The information in this article does not take into account your objectives, financial situation or needs. Therefore, before acting on the information, you should consider its appropriateness to your personal circumstances. Although this information was obtained from sources considered to be reliable, it is not guaranteed to be accurate or complete. This publication was prepared by AMP Financial Planning Pty Limited ABN 89 051 208 327. The information is current as at 19 March 2009 and may change over time.

The examples in this article are provided by way of illustration only and are based on the facts given. You should not take any example as an estimate of the amount of actual aged pension you will receive.