Both term deposits and Self-Managed Super Funds (or SMSFs) allow you to invest your money for the future. Some term deposits are specifically tailored for SMSFs and this quick guide gives you an overview of what a term deposit is, what an SMSF is, and outlines what an SMSF term deposit is to help you make a more informed decision about whether an SMSF term deposit is right for you.
What is a term deposit?
Term deposits are fixed-term investments that generally offer higher interest rates because of their fixed nature. When you invest in a term deposit, you are investing a fixed amount, for a defined term, at a fixed rate.
What are some benefits of term deposits?
Generally higher interest rates. Compared to savings and other transactional accounts, term deposits may offer, and yield, higher fixed interest rates. Generally, the more money you deposit and the longer your selected term is, the higher the interest rate.
Government protected and low maintenance. In Australia, term deposits with authorised deposit-taking institutions (ADIs) are covered by the Government’s Financial Claims Scheme meaning your money is protected for deposits of up to $250,000 per account holder, per ADI, should that ADI fail. The fixed rate also ensures that your money will still gain the same promised interest regardless of what’s happening in the economy (e.g. if interest rates fall).
Additionally, if you’re the type of investor who’s looking for a simple way to increase your money, term deposits are worth consideration due to their simple, low risk nature.
No service or account-keeping fees. Term deposits don’t generally charge service and account-keeping fees. However, an interest reduction, or equivalent adjustment, may occur if you take your money out before the end of your term. Some ADIs also charge other fees for an early withdrawal. Check the relevant ADI’s terms and conditions before you invest if you think you may need to make an early withdrawal.
Lock in your money. For people with impulsive spending habits, term deposit accounts act similarly to a vault. Sure, you could withdraw your money early, but your interest or principal may be reduced. Leaving it in the term deposit account can help curb bad spending habits.
Separates interest from capital. Visualisation matters when it comes to handling your finances and separating your income sources and expenses. Some providers allow you to open a separate account for your interest, which can be a convenient way to access your money without breaking the term agreement.
What are some of the disadvantages of term deposits?
You won’t be able to easily access your money and you won’t be able to make any extra contributions during the agreed, fixed term.
If you seek to wholly or partially terminate your term deposit prior to the maturity date your ADI may apply an agreed interest or principal reduction and/or an administration fee or charge in relation to the withdrawn funds. Check the terms and conditions for the product before investing.
If you may have a need to immediately withdraw or transfer funds that you are thinking of investing in a term deposit, other deposit products (such as a savings account) may be more suitable.
Interest rates may increase while you are locked into your term because interest rates go up and down, all the time.
Depending on whether you choose to have your interest paid monthly, yearly or at maturity, your interest rate may differ.
What is an SMSF?
SMSFs are a private form of investment vehicle, or trust, that lets you save for your retirement. Unlike other investment funds, SMSFs usually have members as trustees (where the trustees are individuals) or as the directors of the trustee (where the trustee is a company), so that all members have a role in managing the SMSF. An SMSF fund can have up to six members, although the requirements across States and Territories may differ slightly.
An SMSF allows you to have greater control over managing your superannuation assets. An SMSF term deposit is one kind of investment that an SMSF may wish to make.
What are some benefits of an SMSF?
Allows more control over your super investments. Unlike industry and retail super funds, with the members of the SMSF as the trustees, or directors of the trustee company, you’ll have direct control over your investments and any insurance. So, if the market changes, you’ll be able to make quick adjustments to your investment or insurance mix.
Wide range of investment choices. Along with greater control over investments and insurance, unlike some industry or retail super funds, an SMSF usually has a wide range of investment options to choose from, including real property assets, commodities, artwork, equities and term deposits tailored specifically for SMSFs.
A tax-effective way to save for retirement. Broadly, money invested in an SMSF is taxed at a lower rate than your personal income tax rate. Speak to your taxation, financial or professional adviser to work out the tax implications of your SMSF.
May help with estate planning. Nobody likes to think about death, but it always pays to be prepared. SMSFs may assist with estate planning in ways that an industry or retail super fund can’t. Speak to your taxation, financial or professional adviser to work out how an SMSF can give you greater estate planning options.
What are some of the disadvantages or risks of an SMSF?
With greater control of an SMSF by members comes greater responsibility for the fund’s decisions and for complying with complex laws (including tax and super laws). Some risks or disadvantages include that:
Members are personally responsible for the SMSF’s decisions.
The SMSF’s investments may not bring the returns expected.
Members are responsible for managing the fund, even if their circumstances change.
The SMSF may be affected if there is a relationship breakdown between members, or if a member dies, loses their job, or becomes ill.
If the SMSF loses money through dishonesty, theft or fraud, for example, the SMSF may not be able to access any special compensation schemes or the Australian Financial Complaints Authority.
What then is an SMSF term deposit?
An SMSF term deposit is broadly the same as a normal term deposit, although it is designed for SMSFs, not individual customers.
SMSF term deposits, like all term deposits, offer a fixed interest rate, meaning that the interest rate is locked for the duration of the agreed term. As discussed above, a fixed interest rate is great if interest rates are falling, but less advantageous if interest rates are rising. If you decide to apply, you should aim to keep updated on the most competitive interest rates for SMSF term deposits.
Only SMSF trustees can apply for an SMSF term deposit. Some ADIs will also have a limit on the maximum number of trustees an SMSF term deposit customer can have. For example, an ADI may specify that to be eligible to open an SMSF term deposit with them, you will need to be a member of an SMSF with between two and four individual trustees, or be a corporate trustee with no more than four directors.
Remember, it’s not mandatory for your SMSF to invest in an SMSF term deposit. But because many SMSFs have greater flexibility in their investment strategy than some retail or industry funds, an SMSF term deposit may be a good option if you are after a lower risk investment to diversify your portfolio.
How to find the best SMSF term deposit rates
Finding the best SMSF term deposit rates in Australia could be as simple as hitting enter on your keyboard after filling out the search bar. However, a smart investor doesn’t just simply go with the "best" super fund term deposit rates, they consider more than one factor, including:
Term length of investment. The interest rate of an SMSF term deposit is likely to be higher the longer its fixed term. Before investing into a banking product that holds your money for a specific amount of time, you need to consider how long you're willing to give up access to your funds.
Ask yourself: Will I need these funds soon? How soon? Do I have enough in my savings account(s) to cover any possible emergencies without withdrawing early from my SMSF term deposit account? Pulling out funds from an SMSF term deposit is more challenging than doing the same with a non-SMSF term deposit account due to the trust structure. To help you, you should compare the best term deposit rates for an SMSF term deposit on a bank-by-bank basis, and by length of term, to see which one fits your needs. There are many comparison sites where you can do that.
Timing of investment. Just like every investment, timing is key for an SMSF term deposit. While this banking product provides a set interest rate for the set term for your funds, you should still consider the timing of your investment (eg whether interest rates are set to fall or rise). As an investor, it's your responsibility to observe and manage the risks for your investments.
Amount of investment. An SMSF term deposit is held by individual trustee(s), or a corporate trustee, and its funds are contributed by its members. As an individual, consider how much you're willing to invest and whether you’re happy with the SMSF’s investment portfolio mix.
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