How to stop tax and inflation eating up your savings income

If you rely on interest on a savings account to boost your income, now is the time to shift that money into a fixed-term deposit. 

Interest rates on savings accounts are currently so low they’re unable to keep savers ahead of tax and inflation, according to financial comparison site mozo.com.au.  

“The picture for savers is becoming more and more bleak,” Mozo director Kirsty Lamont said.

“Savers could be forgiven for thinking they might as well just stuff their cash under their mattress, but the better strategy is to move your money into a top-paying savings account or term deposit so that your savings are in the best position to ride out the current trough and recover.”

Lamont reckoned that if you can afford to stash your cash away for two or more years, there were a handful of term deposit accounts with inflation-beating rates, despite interest rates being slashed on 35 savings accounts since the beginning of the year while at the same time, inflation rise from 1.5 per cent to 2.1 per cent.

Mozo’s data showed that the average ongoing savings account interest rate had slid to 1.83 per cent from 2.04 per cent over the past year.

To beat inflation and tax, Mozo calculated that an average-income saver account would need to earn an interest rate of at least 3.11 per cent but unfortunately, the highest savings account rate on the market at the moment is only 3.05 per cent.

“Since the beginning of 2017 we’ve seen base interest rates cut on seven savings accounts by 0.14 per cent on average, while ongoing bonus interest rates have been hacked on 17 accounts by 0.12 per cent,” Lamont said. 

“As a result, savers would be losing money after inflation and tax eat away at their balance … [but] savers can still find good deals if they’re prepared to part with their money for a few years.”

Money expert Bessie Hassan from finder.com.au said that when it came to savings, it was key to stay on the ball to ensure you receive the best rate.

“To keep one step ahead of the game, it’s important to compare different savings accounts from a range of reputable banks, building societies and credit unions,” she said.

“This low interest environment means that anyone who is relying on the interest from savings as a form of income needs to consider all their options — money sitting in an account just won’t generate the income it used to several years ago.

“As returns for Aussie savers get less attractive, it’s becoming more important than ever to do your homework and compare interest rates to ensure you’re getting the best value.”

Hassan recommended taking advantage of additional superannuation contributions if you have spare cash, as this was a great way to save on tax and earn a higher rate. 

“To ensure you’re getting the best deal for your personal situation, ask your bank for a better rate or to extend your high interest period,” Hassan added.

“Keep in mind though that banks may require a large deposit to be willing to negotiate.”

While Mozo advised putting your money into a fixed term account, and fast — Hassan recommended using an online calculator to help decide if you should place your funds in a savings account or a term deposit.

“Traditionally, fixed-term-deposits offered better savings rates than regular savings accounts, but in today’s market you’re more likely to get a better rate with a regular account,” she said.

Other options from Hassan included peer-to-peer investing and bonds. 

“Property has proven a strong investment, but is traditionally very expensive to get into,” she said.

“There are new innovations on the market now which allow investors to invest in fractions of a property, though the rates of return on these products over time is unknown,” she explained.  

“There are other interesting investment opportunities like gold, one of Earth’s oldest currencies, or Bitcoin – one of the newest. The value of Bitcoin specifically has nearly doubled in the last year.

“But remember what goes up fast can also go down.”

Has falling interest rates hurt your income?