Australian budget 2024-25 for retirees May 14th, 2024

Here’s our take, fresh from the Federal Budget Lockup

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 tonight:

• Deeming rates remain frozen for another 12 months until July 2025.
• All households to receive a $300 energy credit (paid over 4 quarters).
• Rent assistance maximum payment to rise by 10 percent.
• PBS Concessional prescriptions frozen at $7.70 per prescription for 5 years.
• Additional aged care places.

We think that:

Inflationary pressures do exist, and we don’t think interest rates will fall any time soon. Housing price growth will slow, and loan defaults will rise as the supply-side catches up with demand after the reduction in immigration levels. Those improved house prices and healthy super returns may fire up the “wealth effect” where people feel good and spend money. That could be a plus for some sectors of the share market.

The Big Freeze

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.

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 at least 4 percent per annum, or more than $12,000 in interest payments. In other words, you will be “beating the system” by more than $6,000 per year.

For age pensioners, Centrelink takes the value of all your financial assets including cash, bank accounts, shares, managed investments, bullion, account-based pensions, superannuation, and gifts over certain limits, and multiplies 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 thresholds will still change on 1 July.

The freeze 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 fund. Were the deeming rates to increase to “normal”, the deemed income would jump to $66,594.

While that is still well under the cut-off limit of $95,400, it reduces the other income that could be earned from part-time employment, foreign pensions, and rental receipts.

For couples, the combined cut-off income test threshold is $152,640.

Again, these 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.

Other Centrelink measures

Renters receiving Centrelink support 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 receiving Jobseeker or an 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 20 September, but that’s well under Perth’s average rent of more than $500 per week.

Centrelink recipients will also benefit from the $300 per household energy payment, with $75 credited quarterly directly to their electricity account.

For West Australian Netplan subscribers, that comes on top of the State Government’s $400 per household announcement last week.

And on the back of ongoing complaints about processing delays for new Centrelink claims, the government has announced funding for 4,030 staff in the next financial year.

Investment markets

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 we end up paying for our money in the form of interest rates.

In any event, that uncertainty presents opportunities for investors.

Bank Deposits

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 tonight’s 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 of 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.

Property

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 slowdown 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 slowdown in growth could be just around the corner.

Shares

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 likely to be showing a double-digit return by 30 June.

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 that benefit from people with money to burn.

Retailers, travel, and hospitality often do well, along with those sectors receiving direct support through government spending.