Pensioners continue to lose out on disparity between deeming and cash rate

Many pensioners would not be aware that their savings are being squeezed by the big banks. In fact, they have been for more than half a decade. It’s all due to the interest rates which age pensioners earn on specialist bank accounts. Think ANZ Pensioner Advantage account, Commonwealth’s Pensioner Security account, NAB’s Retirement account and Westpac’s 55+ and Retiring account. Sadly, for decades now, Pensioners continue to lose out on the disparity between deeming and the cash rate

What are Deeming and Cash Rates?

Deeming rates are used by Centrelink to calculate a person’s income. They are set by the Minister for Social Services and assume that financial investments (including bank accounts, listed securities and managed funds) earn a certain amount of income regardless of the income they actually earn.

If a deemed interest rate is higher than an actual interest rate, the pensioner’s entitlements could be affected

Crucially, deeming rates are the key component of the income test for the pension.
If a deemed interest rate is higher than an actual interest rate, the pensioner’s entitlements could be affected.

Here’s an example of deeming rates in practice.

For instance, a $200,000 deposit in the Commonwealth Bank’s Pensioner Security account will earn actual interest of $2,965 per year. However, deemed income is $5,747. This disparity will reduce a pension by $26.52 a fortnight. According to Centrelink, deeming is a simple and fair way to assess income from financial assets.

The deeming regime was adopted by Centrelink in 1996

“By treating all financial investments in the same way the deeming rules encourage people to choose investments on their merit rather than on the effect the investment income may have on the person’s pension entitlement”, Centrelink says.

What are ‘Deeming Accounts”

Banks have offered specific accounts for pensioners/seniors since the deeming regime was adopted by Centrelink in 1996. They were marketed as ‘deeming accounts’ and paid actual interest which closely matched the Centrelink deeming rates. Deeming rates were set at 5% for the first $30,000 for single pensioners and $50,000 for couples. Higher amounts earned 7%.

Why is there so much disparity between cash and deeming rates?

By 2010, in the wash-up of the Global Financial Crisis, deeming rates had fallen to 3% and 4.5% respectively – still at or below the cash rate. They remained there for three years, until March 2013.

Pensioners with large deposits started losing out

When the official cash rate fell from 4.5% to 2.5% over a couple of years, the banks followed suit. By December 2013 – as the official cash rate fell to below 3% – the disparity between the cash rate and the deemed rate had become so great that ASIC stepped in. To avoid action for misleading and deceptive advertising, the banks were forced to remove references to deeming and rename the accounts.

Why are pensioners losing out on Deeming Rates?

July 2012, six years ago, marked the first time that the official cash rate was lower than the higher deeming rate. Pensioners with large deposits started losing out.
August 2016 was the first time the official cash rate, 1.5%, fell below the lower deeming rate. Suddenly all pensioners were affected.

Currently, the deeming rates are set at 1.75% for the first $50,200 for single pensioners and $83,400 for couples, with higher amounts assumed to earn 3.25%.

Is the Minister for Social Services not addressing this issue?

There has been no comment from Centrelink or the Minister for Social Services as to why the large disparity between deeming rates and official interest rates has been allowed to occur. One can only speculate how much pensioners subject to the income test have lost since 2012.

These days, finding a savings account with a major bank that pays an interest rate anywhere near the deeming rates is close to impossible. For pensioners not to lose out, either interest rates will have to increase, or the Minister will have to lower the deeming rates, or both.

Useful charts and tables

This image shows the ongoing fall in Centrelink Deeming Rates vs Cash Rates since 1996.

This table shows the interest rates on the big four banks’ pensioners/seniors accounts (as at May 25, 2018):

ANZ’s Pensioner Advantage 0.40% up to $1,999, 1% for between $2,000 and $49,200, 1.7% for $49,200+
Commonwealth Bank’s Pensioner Security 0.5% up to $9,999, 1.1% between $10,000 and $49,999, 1.65% between $50,000 and $249,999, 2% for $250,000+
NAB’s Retirement 0.4% up to $9,999, 1% between $10,000 and $49,999, 1.7% between $50,000 and $249,999, 2% for $250,000+
Westpac’s 55+ and Retiring 0.25% up to $1,999, 1% for between $2,000 and $40,999, 1.7% for $41,000+

 

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