Get a guaranteed return of 5.5 per cent

Term deposits are now an attractive option for funds.

By InvestSMART · 9 Nov 2011

By InvestSMART ·
9 Nov 2011

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Term deposits are now an attractive option for funds.

One of Australia's largest super funds, AustralianSuper, is preparing to launch a range of term deposits as an alternative to cash options. AustralianSuper has signed up National Australia Bank and ME Bank as providers and will start offering three-, six- and 12-month terms from the end of this month.

AustralianSuper's move is part of a trend that has seen a number of super funds introduce or expand term-deposit offerings in their funds during the past year. The combination of a government guarantee and reasonable returns has made them extremely popular with investors since the global financial crisis. Super funds want to get in on the act and banks have been happy to oblige.

In September, ANZ put a range of term deposits on the super and non-super investment platforms of its wealth management division, OnePath.

In April, Commonwealth Bank launched a hybrid term deposit on Colonial's First Choice platform. The investment matures in 2017 and has a rate that is reset as the Reserve Bank changes rates, paying 1 percentage point more than the cash rate. About 12 months ago, Westpac started selling a range of products called Retirement Deposits, which have a degree of sophistication not usually associated with term deposits.

One of the products in the suite, Coupon Select, allows investors to pick terms up to 10 years, to pick fixed or floating rates, or a combination of the two, to switch from floating to fixed and to opt for a return of capital with the interest payments.

Another product, CPI Plus, offers a fixed base rate (currently 3.5 per cent) and the annual rate of inflation on top of that. If inflation is 3 per cent, CPI Plus will pay 6.5 per cent.

AustralianSuper's term deposit offering will be available to members who use its Member Direct investment platform. In addition to the standard administration fee of $1.50 a week, members pay $180 a year for access to Member Direct. AustralianSuper will not set the rates on its term deposits until later this month.

The chief executive of the fund, Ian Silk, says: "The key criterion for selecting NAB and ME Bank was that they could offer sustainably competitive rates, rather than just short-term introductory specials," he says.

Members considering moving from a cash option to a term deposit need to make sure they are comparing apples with apples. A term deposit rate of 5.5 per cent or more for 12 months looks like a good return when compared with the median return of 4.4 per cent for cash options in the SuperRatings survey.

However, the SuperRatings returns are quoted after tax and fees. They assume that 15 per cent tax has been paid on the cash account. To compare like with like, a 5.5 per cent term-deposit rate comes down to 4.7 per cent after tax.

On the issue of fees, the fund's administration fee is the same, whether the member chooses cash or term deposits. Banks do not charge management fees on term deposits (their margin is built into the rate).

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Frequently Asked Questions about this Article…

What term deposit products is AustralianSuper launching for members and when will they be available?

AustralianSuper is preparing to offer term deposits through its Member Direct investment platform, using National Australia Bank (NAB) and ME Bank as providers. The fund will start offering three-, six- and 12-month terms from the end of this month, with specific rates to be announced later in the month.

Why are term deposits becoming popular with super funds and everyday investors?

Term deposits have grown in popularity because they combine a government guarantee with reasonable, predictable returns — features that have appealed to investors since the global financial crisis. Super funds are adding term-deposit options to give members a low-risk alternative to cash accounts, and banks have been keen to supply those products to funds.

Which banks and platforms have recently added term deposits to superannuation investment options?

Several major banks have added term-deposit products to super platforms: ANZ added a range of term deposits to its OnePath wealth management platforms; Commonwealth Bank launched a hybrid term deposit on Colonial’s FirstChoice platform; and Westpac introduced a suite called Retirement Deposits. AustralianSuper is partnering with NAB and ME Bank for its offering.

How do term deposit rates compare with cash option returns in super funds?

You should compare like with like. The article gives an example: a 12‑month term-deposit rate of 5.5% looks strong next to the SuperRatings median cash return of 4.4%. But SuperRatings quotes are after tax and fees and assume 15% tax on the cash account — applying that tax to the 5.5% term deposit reduces it to about 4.7% after tax. Also factor in any platform administration fees when comparing overall returns.

What fees will AustralianSuper members pay to access Member Direct and term deposits?

Members who use AustralianSuper’s Member Direct pay the standard administration fee of $1.50 a week plus an access fee of $180 a year for Member Direct. The fund’s administration fee is the same whether a member chooses cash or term deposits. Banks do not charge separate management fees on term deposits — their margin is built into the rate.

What features do Westpac’s Retirement Deposits like Coupon Select and CPI Plus offer?

Westpac’s Retirement Deposits suite includes Coupon Select, which lets investors pick terms up to 10 years, choose fixed or floating rates (or a mix), switch from floating to fixed, and opt for a return-of-capital structure with interest payments. CPI Plus offers a fixed base rate (noted as currently 3.5%) plus the annual rate of inflation on top, so if inflation were 3% the product would pay 6.5%.

How does Commonwealth Bank’s hybrid term deposit on Colonial’s FirstChoice platform work?

Commonwealth Bank launched a hybrid term deposit on Colonial’s FirstChoice platform that matures in 2017 and has a rate that resets as the Reserve Bank changes rates. The hybrid product was structured to pay 1 percentage point more than the cash rate as it adjusts with official rate movements.

What should members consider before moving money from a cash option to a term deposit in their super fund?

Members should compare ‘apples with apples’: look at the advertised term-deposit rate, after‑tax returns (the article uses a 15% tax assumption for cash), any platform administration fees, the term length (eg. 3, 6 or 12 months), and whether the bank’s rate is sustainably competitive rather than a short‑term introductory special — a key selection criterion cited by AustralianSuper’s CEO, Ian Silk.