Deeming explained: how the government calculates your pension income — and when it works in your favour

If you receive the Age Pension — the means-tested government payment administered by Services Australia — your entitlement is determined by two tests: an assets test and an income test. Services Australia pays whichever produces the lower payment. Most retirees know roughly how the assets test works. Fewer understand the income test's central engine: a system called deeming.

Deeming is, in Services Australia's own words, "a set of rules used to determine the income your financial assets create. It assumes these assets earn a set rate of income, no matter what they really earn" (Services Australia, https://www.servicesaustralia.gov.au/deeming?context=22526, retrieved 5 May 2026). Rather than tracking what your bank account or share portfolio actually paid you in dividends and interest, the government applies a standard rate to the value of your financial assets and treats the result as your assessed income from those assets. It is the notional return — not the real one — that flows into your income test calculation.

The reason deeming exists is practical and fair. Without it, retirees could simply park all their money in low-yielding accounts to minimise their assessed income and maximise their pension, regardless of whether that was the right financial decision. Deeming removes that distortion. Services Australia notes a direct benefit: deeming "provides an incentive to invest, as any interest rates achieved above the deeming rates don't count as income" (Services Australia, https://www.servicesaustralia.gov.au/deeming?context=22526, retrieved 5 May 2026). The system creates a level playing field between retirees who invest in cash and those who hold shares — both are assessed the same way, based on the value of their financial assets rather than what those assets happen to earn.

The deeming structure uses two rates, separated by a threshold. The lower rate applies to the first tranche of your combined financial assets up to the threshold; the upper rate applies to everything above it. The rates and the thresholds move on different clocks, which is a common source of confusion: the rates are set by Ministerial determination on the recommendation of the Australian Government Actuary and next rise to 1.75%/3.75% from 20 September 2026; the thresholds are indexed separately and reviewed on 1 July each year. Because a rate change is imminent, the table below shows both periods — the rates applying now, and the rates from 20 September 2026. Thresholds are unchanged across both (they last moved on 1 July 2026). (Australian Government Actuary, https://aga.gov.au/publications/deeming-rate-recommendation-september-2026; Services Australia, https://www.servicesaustralia.gov.au/deeming?context=22526):

Important: the deeming rates have risen steadily since the pandemic-era freeze ended — from 0.25%/2.25% (May 2020 to September 2025), to 0.75%/2.75% (20 September 2025), to 1.25%/3.25% (20 March 2026), to 1.75%/3.75% from 20 September 2026 — the third rise in just over a year (Australian Government Actuary, deeming rate recommendation, September 2026). The rates are set by the Minister for Social Services on the AGA's recommendation — they do not change automatically with the cash rate or through indexation, and can be adjusted by Ministerial determination at any time. The threshold amounts are indexed separately and were last updated on 1 July 2026, rising from $64,200 / $106,200 / $53,100 to the current $66,800 / $110,600 / $55,300 shown above; they are not affected by the September 2026 rate change.

Only financial assets are subject to deeming. Services Australia lists the main types as "savings accounts and term deposits, managed investments, loans and debentures, listed shares and securities, some income streams, [and] some gifts you make" (Services Australia, https://www.servicesaustralia.gov.au/deeming?context=22526, retrieved 5 May 2026). For couples, this includes the superannuation balances of both partners — but only once each has reached Age Pension age (currently 67). A younger partner's superannuation is not counted in either the assets test or the deeming calculation at all, until the day they qualify. Non-financial assets — investment properties, vehicles, household contents — are assessed under the assets test only and are not deemed.

One of the most important things to understand about deeming is when it helps you and when it works against you. If your investments are earning more than the applicable deeming rate — which has been the case for many cash and term deposit holders during the 2022–2025 period, when market rates ran well above the deeming rates — then your pension income test is calculated on a lower figure than your actual earnings. The government taxes you notionally on less income than you received. That is a quiet advantage that many retirees overlook. Conversely, when actual returns fall below the deeming rate — for example, in a very low interest rate environment — retirees are assessed on more income than they actually received, which can reduce their pension entitlement. The current deeming rate environment is worth checking with your adviser, since a Ministerial rate change could shift the income test position of any cash-heavy client.

For a practical sense of how the income test interacts with deemed income: a couple has an income free area of $396 per fortnight combined (from 1 July 2026; homeowner or not), meaning their first $396 in assessed income per fortnight has no effect on their pension. Above that, the pension reduces by 50 cents in the dollar combined (25 cents each). The income test cuts off payment entirely when combined fortnightly income reaches $4,128.00 from 20 September 2026 (Services Australia, https://www.servicesaustralia.gov.au/income-test-for-age-pension, retrieved 20 September 2026). The pension you receive is the lower of the income-test result and the assets-test result, so deeming only matters when the income test is the one that binds. For a homeowner couple with more than $499,000 in assessable assets the assets test is often the binding constraint — but it is worth confirming which test applies to your specific situation, since that is where any planning will have the most effect.

Pre-1 January 2015 grandfathering applies for account-based pensions held by income support recipients immediately before that date. These pensions are assessed under the older "deductible amount" method rather than deeming, often producing materially lower assessed income (DSS Guide 3.9.3.31, https://guides.dss.gov.au/social-security-guide/3/9/3/31). Critically, the grandfathered treatment is lost permanently if the pension is commuted and restarted, the income support payment lapses, or the pension is rolled over to a different fund. (See the related account-based-pensions-retirement and account-based-pension-transfer-between-funds articles for the full grandfathering mechanics — including the separate, stronger CSHC grandfathering rule.)

Worked strategy example #1 — full pensioner with mostly cash savings

Margaret, 72, single homeowner, has $180,000 in financial assets (term deposits + savings). She receives the full Age Pension. At the rates and threshold effective from 20 September 2026, her deemed income: $66,800 × 1.75% + ($180,000 − $66,800) × 3.75% = $1,169 + $4,245 = $5,414/year (up from $4,514/year under the pre-September rates). That is about $208 per fortnight, still under the single income free area of $226 per fortnight (Services Australia, retrieved 20 September 2026), so the income test gives a NIL reduction either way. Her pension comes through the assets test. Neither the September 2026 rate rise nor the July 2026 threshold indexation changes that outcome for her — her balance is small enough that the deemed income stays under the income free area regardless, though the margin has narrowed.

Worked strategy example #2 — renting couple with substantial financial assets, income test binding

Robert and Helen, both 76, a couple renting privately, hold $580,000 in combined financial assets and nothing else assessable. That is below the $766,000 full-pension assets-test threshold for a non-homeowner couple, so the assets test does not reduce their pension and the income test is the one that binds. (Illustration only — this ignores Rent Assistance and any other income.) At the rates effective from 20 September 2026: deemed income = $110,600 × 1.75% + ($580,000 − $110,600) × 3.75% = $1,936 + $17,603 = $19,538/year = ~$751/fortnight. Income free area for a couple = $396/fortnight. Excess = ~$355/fortnight. Income-test pension reduction = ~$178/fortnight, so their combined pension is about $1,688/fortnight ($1,866.00 − $178).

Four points in time show what actually moved and why. Pre-March-2026 (rates 0.75%/2.75%, threshold $106,200, free area $380): deemed income $13,826/year = ~$532/fortnight, reduction ~$76/fortnight. March–June 2026 (rates 1.25%/3.25% from 20 March 2026, threshold and free area still at their 2025-26 levels): deemed income $16,726/year = ~$643/fortnight, reduction ~$132/fortnight. July–September 2026 (same rates, threshold indexed to $110,600 and free area to $396 on 1 July): deemed income $16,638/year, reduction ~$122/fortnight — the indexation gave them back about $10/fortnight. From 20 September 2026 (rates 1.75%/3.75%, threshold and free area unchanged): deemed income $19,538/year = ~$751/fortnight, reduction ~$178/fortnight.

The September 2026 detail that matters most: for a couple in this position, the deeming rise very nearly cancels out the pension increase. From 20 September 2026 the maximum couple rate goes up by $27.80 each — $55.60 combined per fortnight (Department of Social Services, Social Security Payment Parameters, 20 September 2026 indexation). But the same date's deeming rate rise lifts Robert and Helen's deemed income by $2,900 a year, which is ~$111.54 per fortnight, and at 50 cents in the dollar that increases their income-test reduction by about $55.77 per fortnight. The two changes land within a dollar or so of each other. That offset arithmetic is driven purely by the change in deemed income (0.5% of financial assets, halved for the 50-cent taper), so it holds for any couple whose pension is set by the income test. It does not apply to a pensioner whose pension is set by the assets test — for example a homeowner couple with $580,000 sits above the $499,000 full-pension threshold, so their pension is limited by the assets test, and they receive the full $55.60 increase regardless of the deeming change.

Net effect since before March 2026: Robert and Helen's income-test reduction has risen from ~$76/fortnight to about $178/fortnight — an extra ~$102/fortnight, or roughly $2,650/year of pension, all of it from the three deeming rate rises, partly softened by the July indexation. This is real money out of a household budget, with no change in their underlying financial position. The same dynamic applies to any income-test-bound retiree with a meaningful balance above the threshold, and it is why a headline "pension increase" can arrive as a much smaller number — or, for some, no increase at all — in the actual payment.

If you would like to check where you currently stand, Services Australia publishes the current deeming rates and an online income estimator at servicesaustralia.gov.au. The Department of Social Services (dss.gov.au) publishes Ministerial announcements when deeming rates change. A licensed financial adviser can model both the assets test and income test for your specific circumstances and identify which one is currently determining your payment.

Sources

• Services Australia — Deeming
• DSS Social Security Guide 4.4.1.10 — Overview of deeming
• DSS Social Security Guide 3.9.3.31
• Australian Government Actuary — Deeming rate recommendation, September 2026
• Department of Social Services — Social Security Payment Parameters, 20 September 2026 indexation