The decision by the Reserve Bank of Australia (RBA) to reduce the cash interest by 15 basis points to 0.1% has increased the pain to fully and partly self-funded retirees and the Government needs to reduce deeming rates, according to the Association of Independent Retirees (AIR).
Wayne Strandquist, AIR president, said the cash rate reduction was “a kick the guts” for retirees and would put more downward pressure on term deposits rates with cash held in bank accounts paying almost zero interest.
“When retired, risk tolerance reduces over time to favour more conservative investments with less volatility and less risk like term deposits, bank savings accounts and other fixed interest investments,” Strandquist said.
“The reduction in fixed interest by the RBA continues a trend that has seen term deposit rates fall to historic lows, to a fraction of what they were when many retirees left the workforce.
“After bank account fees are charged and zero-interest paid, retirees are effectively paying the banks to hold their savings.
“This negative return will further lower the living standards of retirees and require larger drawdowns from their retirement savings until they are forced to rely on the Aged Pension.”
AIR had called on the Government to reduce the current deeming rates to reflect the fall in bank deposit rates.
Current deeming rates
Threshold amounts of financial assets
Current deemed rate below threshold
Current deemed rate above threshold
“The 2.25% government deeming rate is over three times the interest rate that can be actually earned today by retirees on a two-year term deposit with the major banks,” Strandquist said.
“To earn returns that exceed the upper deeming rate, retirees are forced to consider riskier investments including a volatile share market.
“At the end of the day, retirees just want the secure, reliable, adequate income over a longer retirement that was proposed in the government’s Retirement Income Framework in 2016 and we are still waiting.”