Back to the future

In 1996 I was working in the Department of Social Security as a Financial Information Service Officer (FISO) and I was often astounded at the large amounts of money that pensioners would deposit into their cheque accounts.

The reason for doing this was that pensioners were being assessed under the income test on the interest they actually earned from their bank accounts. So rather than suffer any reduction in their pension, they would deposit $100,000 in their cheque account and earn no interest, rather than placing it in a term deposit, earning at the time in excess of 7%. Needless to say, the banks were more than happy with this state of play as it gave them access to a large pool of cheap funding.

In order to overcome this, Social Security legislation was amended from 1 July 1996. As a result of the legislative change, money held in bank accounts and managed funds would be “deemed” to be generating a return of 5% on the first $30,000 (for a single) and $50,000 (couple) of financial investments. Where the actual level of financial investments exceeded the threshold, the balance was deemed to be earning 7%.

Money flooded out of cheque accounts into “pension accounts” which, coincidentally, paid the applicable deemed interest rates at the time. Sure, the government did save money as a large number of pensioners had their pensions reduced but, at the same time, the interest earned on the pension accounts more than made up for the reduction in the pension.

The current deemed asset thresholds are $48,000 for a single person and $79,600 for a couple, with deeming rate currently being 2% and 3.5%.

In the 2014 Federal Budget the government announced its intention to go “back to the future” and return the deeming threshold to their 1996 levels of $30,000 and $50,000, from September 2017.

For pensioners, these changes emphasise the importance of having a financial plan that is current so as to ensure that no matter what legislative changes might occur, their money continues to work for them. It should never be allowed to become lazy and pensioners should never become complacent.

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