Deeming

Sydney Morning Herald

Tuesday January 17, 2006

Barbara Drury

Once upon a time retirees could manoeuvre around the income test for government pensions and allowances and gain access to benefits by parking money in bank accounts earning little or no interest.

That lurk was shut down with the introduction of deeming. Under the deeming rules it is assumed investments earn a certain rate of interest, regardless of what is actually earned. This includes income from everything from bank accounts to shares, managed investments, loans (including reverse mortgages), approved deposit funds and super investments held by anyone over 65.

Deeming rates are set by the government and are used to calculate income for pension, benefit and allowance payments. These rates are set below market rates, which is good news for pensioners achieving a high return on their investments. For tax purposes, however, actual income is still assessed.

As a result of the deeming rules banks and financial institutions began offering deeming accounts to anyone over 55 or on a government pension because their ordinary transaction accounts often pay less than deeming rates of interest.

As of July 1 last year the deeming rate for a single person on a pension or allowance is 3 per cent a year on the first $37,200 of investments and 5 per cent on amounts above that.

For couples where at least one partner is getting a pension, these rates apply to a combined threshold of $62,000. Where neither partner receives a pension the first $31,000 of each partner's financial investments is deemed to earn 3 per cent a year, with 5 per cent applying to any amount above that.

These are the rates used by the banks on their deeming accounts which have similar features to standard transaction accounts including an ATM card, cheque facility and phone and internet banking. Credit cards are the notable exclusion.

Some institutions, such as the Newcastle Permanent Building Society, pay above the odds - 5.5 per cent - on balances exceeding $37,500.

However, others such as the NAB, Suncorp and Commonwealth Bank pay next to nothing - 0.1 per cent or less - on balances below $2000.

These interest rates need to be weighed up against fees which vary enormously. For example, Suncorp and ANZ have unlimited free transactions a month, while NAB charges fees on most transactions.

© 2006 Sydney Morning Herald

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