Deeming Fact Sheet

DEEMING FACT SHEET • the first $49,200 of a single customer’s total financial investments; IMPORTANT NOTE • the first $81,600 of a pensioner couple’s Investment decisions should be made taking total financial investments; into account the person’s full circumstances. • the first $40,800 of total financial While all pensioners and allowees can be investments for each member of an expected to hold some savings on an at-call allowee couple. basis, as the amount of savings increases, they should also be expected to have a more diverse A deeming rate of 3.25% applies to financial portfolio of investments. investments above these amounts. The thresholds at which the higher deeming rate WHAT IS DEEMING? begins to apply are indexed in line with the CPI The deeming rules are a central part of the in July each year. social security income test. They are used to assess income from financial investments for HOW DOES DEEMING WORK? social security and Veterans’ Affairs The lower deeming rate reflects the expectation pension/allowance purposes. Deeming that pensioners will generally choose to have assumes that financial investments are earning savings in investments with very high a certain rate of income, regardless of the accessibility and safety, but which tend to amount of income they are actually earning. provide relatively low income. If pensioners earn more than these rates, the extra income is not assessed. The higher deeming rate reflects the expectation that customers with higher amounts The main types of financial investments are: of savings should seek higher returns on some • bank, building society and credit union of their savings, either by accepting relatively accounts and term deposits; lower accessibility (eg term deposits) or by • managed investments, loans and accepting some more risk (eg shares). debentures; However, the deeming rules also create • listed shares and securities; incentives for investors to earn more income • new account-based income streams (since from their savings. If pensioners and allowees 1 January 2015). respond to the deeming rules by investing to get higher returns, their total income will Deeming is a simple and fair way to assess increase. The introduction and application of income from financial investments, as: the deeming system has led to an increase in • customers with the same amount held in the total income of the pensioner population. different financial assets receive a similar assessment; • it reduces the extent to which income support payments fluctuate; • the rate reflects returns that pensioners can get for their savings; • it increases incentives for self-provision because returns above the deeming threshold rate are not counted as income; and

• it simplifies choice of investments - it encourages customers to choose investments on their merits.

WHAT ARE THE CURRENT RATES? Currently a deeming rate of 1.75% applies to:

Updated 1 July 2015 Page 1 Deemed income is calculated by multiplying the The deeming rates are monitored on an total value of a customer’s financial investments ongoing basis. Any changes made to the by the deeming rates. Deemed income is then deeming rates are usually made to coincide added to any other income (eg rental income) in with the indexation of pensions to reduce order to work out the customer’s payment under disruption to pensioners, although the rates can the income test. be changed at any time if there are very significant movements in the factors taken into account. EXAMPLE DEEMING CALCULATION Alan is a single aged pensioner whose Investment return data from a range of financial financial investments are worth $80,000. investments is monitored to ensure the deeming rates reflect returns available to The first $49,200 of Alan’s investments pensioners on their savings. would be deemed at 1.75% which equals $861. The remaining $30,800 is above the FINANCIAL INSTITUTIONS lower threshold and is deemed at 3.25% The Government’s policy is that it should not which comes to $1,001. regulate the terms and conditions of bank accounts; rather to ensure that competition Alan’s total deemed annual income is between banks and financial institutions, such therefore $1,862 ($861 + $1,001). as credit unions and building societies, results in customers being able to shop around for the banking products that meet their needs. Single pensioners whose only source of income is from financial investments can have Financial institutions decide the interest rates $153,908 in financial investments ($271,262 for they offer on their various accounts. Decisions pensioner couples, combined) and still receive about fees and interest rates charges represent the full pension under the income test. This is commercial decisions taken by financial because of the income test free area which institutions in the context of a competitive benefits pensioners. The income test is market place. designed to encourage people to supplement their income support payment with private Conditions for these accounts vary according to income. the financial institution offering them, so it is important that customers shop around financial Currently, single pensioners can have income institutions for the account that best satisfies of $164 a fortnight ($292 a fortnight for a their needs. pensioner couple) before the pension starts to be reduced. For each dollar of assessed While many financial institutions link the interest income over the income test free area, the rates on accounts offered to seniors to pension is only reduced by 50 cents (25 cents generally reflect deeming rates, this is a result for each member of a couple). Part pension is of market forces applying to financial institutions still payable up to an income of $1,911.80 to retain customers, not at the direction of a fortnight for a single pensioner ($2,926.80 a Government. fortnight for pensioner couples).

MONITORING THE DEEMING RATES

Updated 1 July 2015 Page 2