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Deeming: don't be short changed - Eureka Report article

August 27, 2007
Deeming: don't be short-changed
By Scott Francis

PORTFOLIO POINT: Pensioners would be better off having money in a cash account than in one of the banks' deeming accounts, which are geared to minimum levels.

Higher interest rates have triggered a fresh round of negative headlines. Loans are more expensive for businesses and home buyers, and mortgage repayments are soaking up more household income, leaving less for consumer spending.

There is one group of people who will be quietly happy with an interest rate rise, however: those retirees who are living, in part, on the interest earned from their cash account.

As we move towards an era of higher rates, the chase for higher-yielding securities will increase across the board. Retirees with ample funds in cash accounts - especially traditional cash management trusts or online accounts - are now enjoying 'risk-free' rates of at least 5.5% and sometimes up to 6%.

Unless, that is, they have fallen for the great 'deeming account' con.

What is deeming?

Deeming is a calculation that is used to generate an estimate of income earned on the financial assets of a person, and is used in the calculation of the age pension assets test.

For example, let us consider a single age pensioner with $100,000 in a bank account. The deeming rules say that the first $39,400 is deemed to earn 3.5% and the remainder 5.5%. Therefore, for income test purposes, the single age pensioner would be deemed to have earned $4106.

Here is the important part. It does not actually matter if that person earns more than the $4106. For the income test purposes, they are only deemed to earn $4106.

In fact, an article on the website of the Department of Families, Community Services and Indigenous Affairs, says: "Deeming also encourages people to consider earning better returns on their investments. Prior to the introduction of deeming, many income support recipients elected to receive little or no income from their savings."

The whole point of deeming is that it provides a simple assessment of income, and then encourages people to seek higher investment returns without having to worry about being penalised under the Centrelink income test.

How is this being abused?

Let's have a look at a few accounts. The Commonwealth Bank has a 'Pensioner Security Account', which pays interest of 3.5% on balances between $2000 and $39,400. The interest above $39,400 is 5.5%.

The National Australia Bank has a 'NAB Retirement Account'. It also pays interest of 3.5% on balances between $2000 and $39,400. The interest above $39,400 is 5.5%. The NAB website boasts that: "The NAB Retirement Account is specially designed to address the Government's pension income assessment and deeming rules."

ANZ has two deeming accounts on offer, both with exactly the same interest rate structure as the Commonwealth and NAB accounts.

Westpac has a deeming account advertised as being 'designed to comply with legislated deeming rules'. Westpac says: "We use these deemed interest rates as a guide for setting the interest rates on our Deeming Account''

What is the deception?

The deception is this. The deeming rules are not meant to limit what a pensioner earns from their financial assets. In fact, the opposite is true. The deeming rate is meant to be a simple calculation of income that can be used for the Centrelink income test. From there, it does not matter if the pensioner actually earns more than this rate of income; in fact, the Department of Families, Community Services and Indigenous Affairs actually hopes that the deeming rules encourage people to then seek a higher rate of return.

Instead, the banks align their interest rates and interest rate tiers exactly with the deeming rules. It is difficult to think that this is done for any reason other than to misrepresent allowable earning rates to pensioners.

After all, the chances that the four banks we looked at co-incidentally mirrored both the deeming interest rates and the deeming threshold changes are so small as to be not worth considering.

Even some of the advertising on deeming accounts is disingenuous, with statements such as: "Designed to comply with legislated deeming rules" and "specially designed to address the Government's pension income assessment and deeming rules".

What is the cost of this deception?

Let's consider a pensioner with $50,000 in a cash account. In a deeming account earning no interest on the first $2000, 3.5% on the balance up to $39,400 and 5.5% on the rest, a pensioner will earn $1892 worth of interest.

If this same pensioner invested the $50,000 into an online bank account paying interest of 6% a year - and there are plenty of these available - they would earn $3000 a year, an extra $1108. It does not sound like a huge amount of money, but an extra $21.30 a week buys more than the occasional coffee.

What if interest rates rise?

With the most recent rise in interest rates, pensioners should have picked up an extra 0.25% in interest from a good cash account, and there is talk of another interest rate rise later this year. However, those pensioners who have their money parked in a deeming account run the risk of missing both of these potential increases in income entirely.