The recent announcement to lower the official interest rate has put the spotlight on the unchanged Deeming Rate as pensioners face a one-third reduction in their income.
The Deeming Rates (currently 1.75% and 3.25%) are the notional earning rates the government assumes you should earn on your investments and is used in the calculating a pensioner’s entitlement under the Social Security Incomes Test.
“The impact is stark if your investments earn 1% but you are deemed at 3% then the “missing” $2 on every $100 dollars of your investments can reduce you pension entitlement by up to $1 per fortnight,” said Phil La Greca, Executive Manager SMSF Technical and Strategic Services.
“We’ve had 5 interest rate cuts in 5 years since 2015 (with indications of a further cut on the horizon), but the Deeming Rates were last changed in March 2015 by then social security Minister Scott Morrison,” said Mr La Greca.
“If you’re drawing a retirement wage from social security and superannuation, you’ll be forced to get this shortfall from Capital that is meant to generate your income.
“As the gap widens between Deeming Rate and official interest rates, the population will find itself either increasingly reliant on fully funded government pension for their living wage; or increasingly reliant on consuming capital with the hope it doesn’t run out while you still need a living wage.
“If superannuation is designed to get you off the pension, why does a mechanism such as the Deeming Rate act to run your assets out more quickly and put you on the age pension quicker?
“SuperConcepts recently launched our #Time2Enshrine campaign to overcome this very issue raised around the Deeming Rate in wake of the official interest rate dropping.
“We staunchly believe that if Superannuation is defined, and then enshrined, we would avoid the inherent conflict we see as the Deeming Rate and the official interest rate gap widens.
“We believe the Deeming Rate should be linked to the official Interest Rates to avoid a gap widening that makes pensioners poorer and pushes them to rely on the government sooner by burning their capital.
“With the objectives of superannuation defined it would require the Deeming Rate considerations to be guided by the objectives and ensuring they are both in alignment for the greater purpose of the system.
“Any policy that subsequently affects either superannuation or social security would have to satisfy to the enshrined objectives of super,” says Mr La Greca.