Starts at 60 subscribers get the latest on the practical outcomes of the 2024 Federal Budget. Here’s our take and specifically, how it will affect you.
The tax-cuts, changes to HELP/HECS repayments and a raft of other things are already out there.
In a nutshell, here are the changes and announcements that came out on budget night.
We think that:
So here’s a detailed look at Jim Chalmer’s pre-election budget and how it affects seniors.
With interest rates expected to stay higher for longer, those Centrelink customers with money to invest, will benefit significantly from the 12 month extension to the deeming rate freeze.
While the feds are claiming nearly half a million pensioners will be affected, the bottom line is that you’ll only benefit if the grand total of all your financial assets is more than about $260,000. That’s roughly 1/3 of those on a pension or in other words, nearly 2/3 get no benefit from this extension.
Financial assets pretty much includes all of your investments, with the exception of real estate.
Deeming rates were frozen in the midst of the pandemic after interest rates were dumped as an emergency response to Covid.
The RBA overnight cash-rate was set at nearly zero at the time. The deeming rates were then frozen at 0.25 percent for the first $60,400 for singles and 2.25 percent for all amounts above this amount.
For couples, the combined lower threshold amount is $100,200 and above this, the deemed amount is 2.25 percent.
It means a single retiree with say $300,000 to invest, currently has Centrelink deemed income of at least $5,542 per annum.
That $300,000 could be invested in bank accounts paying 4 percent per annum, or more than $12,000 in interest payments. In other words, you will be “beating the system” by more $6,000 per year.
For age pensioners, Centrelink take the value all of your financial assets including cash, bank accounts, shares, managed investments, bullion, account based pensions, superannuation and gifts over certain limits and multiply the value by the deeming rates. This annual total is divided by 26 to give a fortnightly amount.
This amount, plus foreign pensions, net rental receipts and gross employment income is “tested” against the Centrelink income test thresholds. Once income exceeds $204 a fortnight for singles or a combined $360 a fortnight for couples, the pension is reduced at the rate of 50 cents per dollar.
While the deeming rates will remain frozen, these lower rate thresholds for singles and couples will still change on July 1.
With the overnight cash rate now at 4.35 percent, many expected deeming rates to return to more “normal” rates such as 4 percent and 6 percent respectively. These were the deeming rates in 2008 when the cash rate was at 4.25 percent.
Had the deeming rates returned to these levels, a single pensioner with $300,000 in financial assets, would have deemed income of more than $16,792 per annum and have had more than $220 a fortnight clipped off their pension. A pensioner couple, would have seen a reduction of about $128 per fortnight on the back of deemed income of just under $16,000 per annum.
Ouch !
The freeze extension also benefits Commonwealth Seniors Health Card (CSHC) customers with significant amounts in Account Based pensions.
Assessable income for the CSHC includes taxable income added to the deemed income attributable to money held in ABPs.
A single retiree with a $1,500,000 investment in an ABP, currently has deemed income of $32,542 per annum attributable to the ABP fund. Were the deeming rates to increase to “normal”, the deemed income would jump to a whopping $88,792.
While that is still well under the current cut-off limit of $95,400, it reduces the other income that could be earned from bank deposits, share dividends, part-time employment, foreign pensions and investment property rental receipts.
For couples, the combined cut-off income test threshold is $152,640 and no, it doesn’t matter who earns the income.
Again, these cut-off limits will lift in September in line with inflation.
We expect that the deeming rates freeze will come off in July 2025, after the next election.
And then? Watch out!
Renters receiving Centrelink income support payments, are set to pick up an extra 10 percent in Centrelink rent assistance payments.
Under current rates, the maximum rent assistance payable for a single age pensioner is $94.10 per week. With the announced 10 percent increase, that would lift the payment to $103.51 per week. That assumes they’re paying at least $198.47 a week for rent.
These figures will rise slightly by the time the increase kicks-in after September 20, but that’s well under any capital city’s average rent of more than $500 per week. In fact, excluding Hobart, median rent in the remaining capital cities is more than $600 per week.
Centrelink recipients will also benefit from the $300 per household energy payment, with $75 credited quarterly directly to their electricity account.
That comes on top of various State Government’s energy rebates that you may be entitled to.
And on the back of ongoing complaints about processing delays for new Centrelink claims (which we have highlighted here at Starts at 60), the government has announced funding for 4,030 staff in the next financial year.
While Treasurer Jim Chalmers is optimistically spruiking the minimal inflationary effects of his pre-election budget, money markets both in Australia and overseas, will ultimately determine what you or your kids and grand-kids end up paying for their money, in the form of interest rates on loans.
In any event, that uncertainty presents opportunities for investors.
For the uber-safety conscious, it means that depositors in boring old bank accounts can expect to see rates higher for longer.
In the past few weeks leading up to the budget, we’ve seen those deposit rates holding their own. In other words, they’re not reflecting a fall in interest rates any time soon.
Deposit rates of up to 5.7 percent per annum are currently available as an introductory rate, with the big 4 banks offering 12 month term deposits at 4 percent or more.
Remember. Bank, building-society, credit union and online bank deposits of up to $250,000 per account holder per institution, are protected by the federal government. No other investment has that security.
On the downside, interest rates remaining higher for longer can also mean distress in the housing market.
Banks are already making provisions for an increase in loan defaults and just last week, the RBA noted that while supply constraints still exist, national housing growth is slowing.
That, combined with a slow-down in immigration could mean that when the supply-side catches up with demand, the upwards pressure on house-prices and rents will really diminish.
It might not mean a fall, but a significant slow-down in growth could be just around the corner.
With looming tax cuts, the boost in infrastructure spending and the fact that everyone’s house has gone up in value since the pandemic, we shouldn’t underestimate the “wealth effect”.
Throw into the mix an excellent run on the share-market since the start of the year, you’ll have superannuation account balances possibly hitting a double digit return by June 30.
Economists argue that when everyone feels good about things, this wealth effect can boost consumption.
That can translate to a lift in share prices, particularly in those sectors who benefit from people with money to burn.
Retailers, travel and hospitality often do well, along with those sectors receiving direct support through government spending.