Get a guaranteed return of 5.5 per cent

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).