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Pensioners ‘savaged’ as Government assumption erodes savings

Lucy Dean
·4-min read
Pensioners are getting a rough deal. Images: Getty
Pensioners are getting a rough deal. Images: Getty

Australia’s pensioners may be forced to invest their savings in riskier assets unless the Government addresses record low savings rates, experts are warning.

While the Reserve Bank of Australia’s November interest rate cut was good news for homeowners, it presented fresh challenges for Australians relying on their savings, including pensioners.

According to analysis by financial comparison site Mozo, term deposit rates for pensioners are at a record low and out of step with the Government’s official deeming rate.

The pensioner deeming rate is the amount of income the Government assumes pensioners are earning on their financial assets and is used to decide how large their pension is.

The deeming rate is currently set at 2.25 per cent for single pensioners with balances of $53,000 and more or $88,000 for couples. It’s 0.25 per cent for pensioners with balances below those thresholds.

Mozo director Kirsty Lamont said the idea of any pensioner getting more than 2.25 per cent on their financial assets is “a fantasy”.

As it stands, the average pensioner account rate is earning 0.59 per cent – 1.66 per cent below the deeming rate.

But some pensioners are getting even less than that: the Commonwealth Bank offers the lowest pensioner rate at just 0.05 per cent.

“Although the government assumes pensioners are getting at least 2.25 per cent annual return on every dollar over $53,000 in savings or investments to determine their pension income, the numbers tell a different story,” Lamont said.

Pensioners forced to make risky decisions

Mozo said pensioners had been “savaged” by the cuts, noting that those who have their money with ANZ, Westpac, NAB or Commbank have been hit especially hard as those banks offer average return ranges from 0.05 per cent to 0.35 per cent.

The highest 12 month term deposit rate is currently BankVic’s 1.05 per cent rate. Investing $25,000 with that rate would earn pensioners $263 in interest, although this is higher than the $160 they would make with the average 0.64 per cent term deposit rate.

“Times have never been tougher for pensioners when it comes to generating an income from their savings, so following the third official rate cut this year it’s time the government did the right thing by older Australians and reduced the deeming rate,” Lamont said.

“If the government fails to act we could see retirees chasing higher returns by investing in riskier investments, which could ultimately jeopardise their retirement savings.”

Allianz Retire+ CEO Matt Rady agreed, saying retirees who decide to invest in shares to earn a higher yield are exposed to dips.

“Another financial shock could be financially catastrophic for them,” Rady said.

“Retirees are being forced up the ‘risk curve’ in the search for yield. They are in a no-win situation. Returns from cash and bonds are too low to fund a dignified retirement. And high sharemarket volatility can damage their financial and physical wellbeing.”

Speaking on Wednesday, Treasurer Josh Frydenberg said the Government is open to cutting the deeming rate for pensioners and said it will monitor the rates.

“The deeming rate takes into account the returns that can be achieved by investors on a range of assets, not just cash deposits, but it can be on stocks in the stock market, it can be on fixed interest investments and a whole range of assets, hence there are two levels to the deeming rates,” he said.

He noted that the Government cut deeming rates in May by 0.25 per cent.

“The government has already acted on deeming rates. We continue to monitor movements actually in the cash rate, but the government has taken action, which has benefited pensioners right across the country.”

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