The deeming rates to assess income from financial investments for pensions and allowances are expected to become controversial as the rates increase and affect a wider range of account-based pensions.
SMSF Professionals’ Association of Australia (SPAA) technical and policy senior manager Jordan George said the current deeming rates affected a very narrow range of account-based pensions.
“We’re pretty much at an all-time low in interest rates at the moment and it might stay there for a while, but if deeming rates go up, it actually starts to affect even lower account-based pensions, so from an equity perspective this is not a great measure and it can be quite critical,” George said at the 2014 SPAA National Conference in Brisbane last week.
“The way this part of the policy works means that there can be quite a lot of contest over this measure in the future to come, especially as the deeming rates go up it’s going to affect more people and reduce pension entitlements more.
“Right now, we haven’t got to it yet, but legislative changes always create more controversy once they actually hit and once they hit people’s bank accounts.”
In November, the deeming rate decreased from 2.5 per cent to 2 per cent for the first $46,600 of total financial investments held by a single pensioner, or the first $77,400 for a pensioner couple.
For financial investments above these amounts, the deeming rate decreased from 4 per cent to 3.5 per cent.
George said if the current deeming rates were to go up anywhere between 1 per cent and 3 per cent, the reduction in pension would grow quickly and hit people around the low to middle income bracket the hardest.
“What is meant to be behind this policy is that as those deeming rates go up, their investment returns should be going up too, because deeming rates should reflect what the market is doing to reflect the returns people are getting on their financial investments,” he said.
“So what the policymaker is saying is that they are going to reduce your pension entitlement as you have greater investment returns.
“Now this is a bit of a double free kick for the government in a way because they get to reduce their outlays on pension entitlements and, at the same time, not for people in pension phase but in other parts of the tax system, as investment returns grow they’re actually taking more tax money in.”
