It’s been a rough old ride over the past decade for retirees looking to create an income outside of superannuation.
Rates on term deposits – a long-time favourite of investors looking for a return on their capital – took a dive during the Global Financial Crisis and have never recovered.
How much of a dive? Well, in August 2008, a month before US investment bank Lehman Brothers collapsed, helping take much of the global financial system down with it, Reserve Bank of Australia records show that the average rate on a 12-month, $10,000 term deposit account was 7.25 per cent per annum.
Six months later, they’d plunged to 3 per cent, a level from which they’ve staged short recoveries only to slide back, with the average rate in August 2018 sitting at 2.15 per cent per annum*.
That said, term deposits remain popular with savers aged 65-plus, Kathryn Carpenter, Westpac’s head of savings and investing needs, says, because they’re still well-placed to meet another important retiree requirement: peace of mind.
“Term deposits give control in terms of what return you’re going to get and how you’re going to get it, in that you have a choice of how often you prefer to receive your returns and how long you’re invested for,” she points out. “And we’re seeing a wider range of choice in terms of how you open and manage term deposit accounts, whether it be in-branch or digitally.”
What Carpenter calls peace of mind is the long-held investor principle of diversification – spreading your capital across a range of asset classes, in part so low-risk, low-return investments act as a hedge against high-risk, high-return ones – with term deposits’ spot at the far end of the low-risk spectrum making them classic choice in a diversified investment portfolio.
One of the factors that make term deposits low risk is the fact that sums up to $250,000 are protected by Australia’s Financial Claims Scheme (which guarantees all bank deposits up to that amount), so while other investment classes may be impacted by external events such as a stock market collapse or economic downturn, your term deposit remains safe.
So, if you’re interested in opening a term deposit, what should you consider?
“It’s important to think about what you want to use the funds for first, because it’s more important than the rate of return,” Carpenter says. “That decision will set you on the path of what decision you then make around term payment and ongoing management of your account.”
If your desired outcome requires receiving returns for a shorter period just to help you reach a specific savings goal, you might wish to consider an at-call savings account, alongside or rather than a term deposit. At-call accounts typically, but not always, pay a slightly lower rate than term deposits but offer quicker access to your funds.
That’s because term deposit accounts often require 31 days’ notice if you wish to break the term agreement, and breaking the agreement means you’ll likely receive a reduced rate of interest as well as possibly incurring a penalty fee.
Some at-call accounts allow you to set specific target amounts or goals, if tracking the growth of your funds towards a goal is something you’re keen to do. For example, Westpac’s Life account allows savers to set up to six short- and long-term savings goals within the same account, has no fees and, at 1.5 per cent per annum, offers the highest variable base rate available from any of the major banks on a savings account. It also pays 0.8 per cent per annum variable if the account-holder makes a deposit every month and the total account balance grows.
“That’s a common combination we see retired customers using – a term deposit and a Westpac Life or eSaver account,” Carpenter says. “That way they have rate certainty with the term deposit and higher access if they need to dip into their funds with a Westpac Life or eSaver account.”
Although rates on term deposits are far from their historical highs, there is still competition among banks and building societies to offer the best rate in the current market so it’s worth comparing offers before settling on your provider. You can do this by using any one of the number of comparison engines available online – just make sure that you take note of which term deposit actually offers the best rate, and not which one is promoted at the top of the comparison table.
If you have a few preferred providers, banks almost always publicise their rates on their sites for savers to check. Westpac, for example, regularly runs online term deposit offers that allow customers to open and fund a term deposit online at a competitive rate.
The rate you receive depends on the size of your deposit, as well as the length of the term for which your money is locked up.
Term deposits are said to have a ‘tenure’, which can be as short as one month, ranging up to tenures as lengthy as five years – and the longer the tenure, the higher the rate usually on offer. If you do wish to terminate your deposit before the term is finished, as well as needing to give notice to the bank and likely forgoing some of your interest payment, you may have to pay a penalty fee.
But while it’s important to understand the tenure and other conditions attached to your term deposit, Carpenter says the extra steps required to access your funds is what attracts many customers to the accounts.
“Some people like their money being locked away so they’re not tempted to dip into it – the lower access is a benefit, not a detractor for them” she points out.
There are a few ways you can receive the returns on your term deposit: monthly, quarterly, annually or at maturity. ‘Paid on maturity’ term deposits pay your interest as a lump sum at the end of the account’s tenure. ‘Paid monthly’ term deposits, which pay the interest owned on a monthly basis, are popular with savers looking to create a regular income from their capital.
If you don’t need your capital or return when the account’s tenure is complete, you can elect to roll the funds into a new term deposit.
* See ‘retail deposits and investment rates’ at rba.gov.au/statistics/tables
Things you should know: The information in this publication is general information and factual only. It does not constitute any recommendation or financial product advice. It is an overview only and it should not be considered a comprehensive statement on any matter or relied upon as such. Read the product T&Cs available at westpac.com.au before deciding. © Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714