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My Term Deposit is About to Mature – What are my Options?

Term deposits have been a staple of many people’s wealth portfolio for a long time. However, with interest rates slashed in recent years, we are now seeing the banks (especially the “Big 4”) offering miserly interest rates of around 0.5% per annum. This is now lower than the rate of inflation, so term deposit investors effectively see negative real returns upon maturity. As a result, many are now questioning the effectiveness of this style of investment, and wondering whether it’s worthwhile rolling over their matured term deposit or if it’s best to explore other options.

So, what else is out there?

Shop Around for a Different Term Deposit

Why stick with a poor interest rate and return when you don’t have to? If you step outside of the traditional “Big 4” banks, you may be able to find a term deposit with a far more attractive interest rate. Some smaller lenders are offering interest rates of around 0.7% for a 12-month term, so while the bang-for-your-buck factor isn’t astronomical, it’s still a marked improvement over the traditional providers. Note that the Financial Claims Scheme covers Term Deposits offered by the banks, so you’ll be reimbursed (up to $250,000) should your lender go under.

Fixed Term Annuities

Outside of the traditional banking structure, a fixed-term annuity (which returns your capital at the end of the term) can yield, in some cases, up to 1% for a 12-month term. Note that while the potential returns are higher given the greater interest rate, the life companies that offer these investment structures are not guaranteed under the same Financial Claims Scheme, and as such carry a slightly higher level of risk when compared to a traditional term deposit with a bank.

Shares

Shares are a well-trodden investment path that may entitle investors to an income payment, known as a dividend. Often this dividend is accompanied with franking credits, meaning the end investor only pays tax on this income at their marginal rate less the corporate tax rate (as the dividend is paid from the company’s after-tax profit). Therefore, if your assessable income is nil, you will receive an income boost. However, as the price of shares fluctuate every minute of every day, shares come with the risk that the value of your capital may go backwards (over your investment timeframe).

Hybrids

Hybrid securities are offered by most major banks and are another viable option for some investors. These are complex financial instruments that feature both equity and debt, offering regular interest payments at interest rates that are generally several percentage points greater than term deposits. Hybrids hold similar risk to shares when it comes to capital movement/losses (particularly when you look at the short-term).

How MP+ Can Help

The importance of engaging a qualified financial planner when looking at investment options cannot be understated. The Wealth team at McKinley Plowman help clients on a weekly basis to develop an investment strategy, manage their portfolio, and provide and implement advice. Having this support team around you can make your investment journey much smoother and secure, no mater what stage you’re at.

Get in touch with us today via our website, or call us on 9301 2200 (Joondalup) or 9361 3300 (Victoria Park).

General advice warning: The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product.

Further reading: MoneySmart.Gov.au Investment Information

written by:

Justin McMillan

Financial Adviser Justin McMillan has been with McKinley Plowman for several years, following our acquisition of his practice Smartwealth. He firmly believes that while financials, investments, and strategies are important in an individual's financial plan, they are simply the vehicles to allow clients to get where they want to be. Justin takes a holistic and rounded approach and focuses on the individual, taking the time to listen and understand what drives and motivates his clients.