Rising interest rates and deeming rules...
By Noel Whittaker Spring 2008
Rising interest rates might be good news for self-funded retirees, but they have the potential to create challenges for age pensioners. This is because the deeming rules that are used to work out how much age pension is payable are adjusted in line with movements in the money market.
The latest deeming changes took place on 20th March when they were moved up to 4% on the first $65,400 and 6% on the balance for couples. For a single pensioner the first $39,400 is now assessed at 4%, and the balance at 6% – they were previously 3.5% and 5.5% respectively. The assets that are subject to deeming include bank accounts, shares and managed funds, debentures, superannuation when the owner has reached pensionable age, and deprived assets such as loans or excess gifts.
The changes mean an automatic drop in age pension for anybody whose eligibility is determined by the deeming rates, but they do not mean that pensioners need be worse off. Remember, deeming was introduced to encourage pensioners to educate themselves about investing so they would seek higher safe returns, and pensioners who take good advice will find there are plenty of opportunities available.
For example, many of our major institutions are offering a totally secure 7% for online interest bearing accounts and you can obtain at least 8% if you wish to lock your money away for a year or so. This is far in excess of what Centrelink deems you to be earning, so the extra income you receive will more than make up for any drop in pension. If you are not frightened of shares, there are now blue chip Australian companies yielding better than 7%, with good prospects for capital gain too. But be wary of the deeming accounts offered by the major banks because some of them pay just 4% on the whole balance and don’t give you 6% when your balance passes the upper level threshold.
I appreciate the last few months have been extremely nerve wracking for many retirees, but remember the Chinese proverb “When times get tough, paint the shop.” This is not a suggestion that you rush out and spend money painting your home, but it’s a great time to remind yourself that times like these provide wonderful opportunities to look at your finances to see if you can work them better. Here is an example that shows how a simple restructuring can make a world of difference to a pensioner’s financial situation:
A pensioner couple have $275,000 in an allocated pension fund, $20,000 cash and personal effects totalling $15,000. Before the market fell, their superannuation was worth $310,000, so they are concerned about their finances. However, after doing a budget, they worked out they can live comfortably on $45,000 a year - considerably less than their present income of $56,776 a year which comprises age pension of $16,776 and allocated pension of $40,000. A smart strategy would be to reduce their allocated pension to $25,000 a year which would increase their age pension to $21,038 a year and give them a total income of $46,038. This would not only boost their age pension, it would also reduce the amount of money that is being withdrawn from their allocated pension fund each month. The benefits would be twofold – their funds would have more time to recover and their allocated pension would last longer.
There’s never a bad time to review your finances, and the current market conditions are a great chance to investigate potential buying opportunities. But take the time to do your research – what’s appropriate for your neighbour might not be appropriate for you. There are plenty of proven strategies that highly qualified financial advisers can discuss with you. Sometimes all you need is a little motivation to maximise your returns and build a happy future.
Not a member of Vipers? Visit www.vipover50s.com.au (Vipers) to learn more about the Vip Over 50's Club!
