The loud debate about whether the proposed changes to superannuation are retrospective or fair, belies the fact that for many people it's moot.
For most Australians, superannuation means the contributions paid by their employer. This was only made compulsory in 1992 and, while it's now 9.5 per cent of salary, it wasn't long ago that it was only 3-4 per cent.
Most people don't pay extra money into super, so proposals to limit contributions or cap the tax-free balance are irrelevant to them.
There is a large army of self-funded retirees who care deeply about the nuance of superannuation policy, but there are many more people who receive the age pension. Three in four retirees aged 45 and over get some pension, and one in two rely solely on the pension, according to the Australian Bureau of Statistics. Since anyone currently on the age pension is by definition 65 or over, the proportion would obviously be higher in the older age groups.
One thing that pensioners care deeply about is the "deeming rate" used by the Department of Human Services to assess income from investments. Rather than measure the actual investment returns of everyone who receives a welfare payment, the department applies a standard rate across the board and adds the calculated income to other income. If you earn more from your investments than the deeming rate, that's your gain; if you earn less, too bad.
It's a practical solution but there's a problem: if the deeming rate is set too high, it makes life very difficult for pensioners because it assumes income that isn't there.
While the deeming rate applies to all government income support payments, age pensioners have fewer options because their life stage means they're, quite sensibly, more likely to hold safe investments with low returns such as cash and other fixed-interest products.
Deeming rates apply to financial assets such as savings accounts and term deposits, managed investments loans and debentures (a type of corporate security backed by assets), listed shares and securities, account-based income streams, and gifts.
The current deeming rate if you're single is 1.75 per cent a year for the first $48,600 of your financial investments and 3.25 per cent above that. If you're in a couple, and at least one of you receives a pension, the 3.25 per cent rate kicks in at $80,600 of combined assets for the pension.
The thresholds are indexed to inflation, but the percentage rate is set by the social services minister. It's officially under continual review, though any changes are implemented in March and September to minimise disruption.
The rate has not changed since March 2015, back when Scott Morrison held the portfolio, despite the recent drop in the cash rate to 1.75 per cent.
Recently, a reader wrote to my colleague Ross Gittins, arguing that the 3.25 per cent rate was unrealistic. He cited the fact that Commonwealth Bank is currently paying 2.4 per cent on a six-month term deposit, and asked how he was meant to earn a return of 3.25 per cent, without taking on too much risk.
While it might have been meant as a rhetorical question, I decided to try to find out.
The first thing to do is to shop around for a better term deposit. You can usually get better rates outside the Big Four banks, and it's no riskier since all banks regulated by Australian law are also covered by the government deposits guarantee. This protects deposits up to $250,000 per person per institution.
Financial comparison site Canstar lists at least one bank offering a better rate than the deeming rate: Me Bank pays up to 3.3 per cent on a six-month term deposit.
QPCU, Australian Military Bank, Heritage Bank, P&N Bank, U Bank, AMP, Teachers Mutual Bank and UniBank all have six-month term deposits with rates 3 per cent or above.
I also spoke to a financial expert, JBWere investment strategist Nick Ryder, to ask his advice on how to beat the deeming rate without taking unacceptable risks. You don't need to earn more than 3.25 per cent for all your investments, just the part that's over your threshold.
Ryder suggested listed hybridised securities, such as those offered by the banks and other financial institutions. The current returns, including dividends, are about 6 per cent a year.
Ryder says a pensioner could have most of their savings in term deposits, and just 10-20 per cent in the listed hybridised securities to get over the 3.25 per cent threshold.
Then again, not all investment advisers are a fan of hybrids.
So yes, it's possible to earn the deeming rates, just. It's still overdue for a review.
Caitlin Fitzsimmons is editor of Money.
Sydney Morning Herald
