Retirement, Superannuation

Deeming rate gap eroding retiree capital

deeming rate gap

The erosion of pensioner capital can result from the gap between the deeming rate and the official interest rate, but a solution is available.

The gap between the official interest rate and the deeming rates set by the government is creating a situation where pensioners could be eroding their superannuation in order to provide themselves an adequate income stream, an SMSF technical expert has said.

The deeming rates are used to determine the amount of investment income an individual earns with relation to calculating a pensioner’s entitlement under the social security income test. The rates are currently 1.75 per cent and 3.25 per cent, while the official Reserve Bank of Australia (RBA) interest rate has been set at 1 per cent.

“The impact is stark if your investments earn 1 per cent but you are deemed at 3 per cent, then the ‘missing’ $2 on every $100 of your investments can reduce you pension entitlement by up to $1 per fortnight,” SuperConcepts SMSF technical and strategy services executive manager Phil La Greca said.

“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 rates and official interest rates, the population will find itself either increasingly reliant on a 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.”

The gap between deeming rates and the official interest rate had widened significantly over the past five years with five cuts in the RBA official rate and no change to the deeming rates since 2015.

La Greca suggested tying deeming rates to the official interest rate and enshrining the definition of superannuation are measures that would deliver a solution to the current problem potentially pushing retirees onto the age pension as a result of running down their super fund capital.

“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,” he said.

“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 the enshrined objectives of super.”

SuperConcepts last week launched a campaign to have the government enshrine the purpose of superannuation in law.

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