This week's 0.25 per cent reduction in the interest rate used to calculate pensioners' income from financial assets confirms the pressures now facing retirees. Gone are the days when self-funded retirees and other investors could count on receiving a decent return from safe investments.
Subscribe now for unlimited access.
$0/
(min cost $0)
or signup to continue reading
Investors can count themselves fortunate that Australia has maintained higher cash interest rates than those prevailing in Europe, US and Japan. However, with the economy weakening here and pressure to lower the dollar's value, Australian interest rates are now moving to much lower levels.
The new pensioner deeming interest rates are just above the returns available elsewhere for safe investments. Considerable effort is required to find a fully accessible account providing better returns than the new single-person deeming interest rate of 1.75 per cent for amounts up to $48,000 and 3.25 per cent for balances above this level.
After the most recent cash-rate reduction, the most competitive three-month term deposit rate is about 3.1 per cent. Obtaining this rate can involve switching financial institutions as well as tying the money up for the fixed period and on maturity then renegotiating a new rate which could well be lower.
Financial institutions are happy to offer deeming accounts because of the low interest rate on the first part of the account and the fact that historically many accounts have been low activity ones. For example, the return on a single person $60,000 account is now 2.1 per cent while that on a $100,000 account is now 2.5 per cent.
Pensioners can still obtain higher safe investment interest rates than these at least until the official interest rate falls further. The incentive to do this is that investment returns higher than the deeming rates provide additional income which is not subject to the pension income test.
This is why many retirees are now turning to more risky, higher yielding investments. Even after the most recent 10 per cent rise in the sharemarket, dividend yields including the value of franking credits exceed the deeming rates by a substantial margin. However, unlike deeming accounts and fixed-interest investments, owning shares and property involves the risk of capital losses.
As well, there's a further issue pensioners have to consider. Centrelink reviews the value of financial assets every six months, applying both deeming and the asset test to the new values. When the asset test applies, the pension entitlement is reduced by 3.9 per cent of any increase in the value of their assets.
On the flip side, deeming account and other investments which don't appreciate in value allow automatic access to all increases in pensions under indexation arrangements or when deeming rates are reduced as occurred this week.
