People who rely on term deposits will be watching with horror as term deposit rates fall. Their income is falling, although as Mark Patton, of Stuart Carlyon Financial Advisors points out, inflation is falling at the same time, easing some financial pressure. It’s the after-inflation return of investments that matters over the long term as well, Patton adds.
There’s an argument that it’s unwise to rely on term deposits long-term, because they’re eroded by inflation. A financial adviser will suggest a range of other investments as part of a diversified portfolio. A newly retired person, for example, should in most cases keep a portion of their savings in growth investments.
People still keen on term deposits and looking for a better return have a range of options and shopping around pays off.
For example, your main bank won’t always offer the best interest rates on term deposits and if it’s a significant amount of money for you, then comparison sites such as Interest.co.nz will help identify alternatives. That could be different providers, including lesser-known banks such as Co-operative Bank, ICBC, Bank of China, Heartland Bank or SBS Bank. Always check out their credit rating. The lower the rating, the greater the risk.
Or it could be alternatives to term deposits such as notice saver accounts. With notice saver accounts the money keeps earning interest for as long as it remains deposited. Savers have to give notice such as 32 days or 90 days when they want the money back. Heartland Bank, Kiwibank and Rabobank are the three main banks currently offering notice saver accounts and at the time of writing their top notice-saver interest rates were 5.5%, 5.1%, and 5.15%.
A real problem with term deposits and notice saver accounts is “liquidity” or the ability to withdraw money when needed, said Patton. Laddering term deposits, with the money broken down into multiple terms with different maturity dates, will help.
A number of fund managers such as Booster, Kernel and Sharesies offer instant access savings accounts, which often have higher returns than bank term deposits. The returns on these “bank-like” accounts are not fixed and can go up or down according to economic conditions. A number of digital disruptors are also operating in this space, offering higher interest rates. I wrote about the phenomenon here: Tinyurl.com/NZHdisruptors
Anyone who pays more than 28% in income tax should consider choosing PIE versions of term deposits, notice savers and other investments. Most banks, for example, offer PIE versions of their term deposits. The difference is you’re taxed at a lower rate, which means your returns are higher.
Financial advisers often steer clients from term deposits to other low-risk investments such as bonds, bond funds, or cash and income funds.
Joe Bloggs DIY investor often doesn’t understand or even know of bonds. Patton says when you buy a bond, you’re effectively lending money to a company, or government, which pays a return similar to interest, on your investment. They’re slightly more complex because the value of the bond can go up and down. A bond fund is a fund that holds multiple different bonds, which diversifies the risk.
Financial advisers may recommend cash/income-managed funds to clients. They have some similarities to defensive or conservative KiwiSaver funds. A cash fund invests mostly in term deposits, bonds and other lower-risk fixed-interest investments and can be withdrawn at will. The returns will typically be a bit higher than an investor can get in the bank because the fund can negotiate better rates.
The thing to be careful with here, said Patton, is understanding what exactly that fund invests in. Some will have riskier assets under the bonnet than others, yet they might have very similar descriptions.
“It’s not just a case of [just] looking at the returns,” he said. “Are they taking on any risks in order to give them the appearance of a guaranteed payout?”
It wouldn’t be the first time that risky investments were sold as safe. Just ask investors who put their money in Du Val over the past few years, or Hanover Finance in the lead-up to the GFC.
