It pays to be aware of new regulations guaranteeing a bank's deposits when you have long-held savings, writes George Cochrane.
I AM a self-funded retiree and do my own thing. I have term deposits maturing on December 30, 2011. If I renew them to mature, for example, in 12, 24 and 36 months, will the government guarantee to cover these until the longest maturity date of December 30, 2014? The total amount of my term deposits is under $1 million. So other than the four big banks, what financial institutions are covered under the government guarantee? Also, when the government guarantee on deposits drops to $250,000 per person per institution from February 1 next year, does this refer to money in ordinary deposits or term deposits? H.S.
The guarantee under the Commonwealth's Australian Financial Claim Scheme applies to all "approved deposit-taking institutions" or ADIs. The list of ADIs includes Australian banks, building societies and credit unions as well as subsidiaries and branches of foreign banks. The full list can be found at apra.gov.au.
If your aggregated balance of at-call and fixed-term deposits with an institution is less than or equal to $250,000, it will continue to be guaranteed after February 1 under the Financial Claim Scheme.
The Treasurer made his announcement on September 11 and therefore created a special exemption for term deposits existing at that date. They continue to be covered at the $1 million cap until December 31, 2012, or until the deposit matures, whichever occurs sooner. After that the cap drops to $250,000.
Term deposits that mature before February 1, 2012, and are rolled over will be covered up to $1 million until February 1, 2012, and will be subject to the $250,000 cap from then on. Term deposits that existed on September 10, 2011, and mature between February 1, 2012, and December 31, 2012, will continue to be covered up to $1 million until maturity.
After that they will be covered under the new $250,000 cap.
Deposits that reach maturity after December 31, 2012, will be covered under the $1 million cap until December 31, 2012, and then under the new $250,000 cap thereafter. It's a bit confusing but stay with it!
Property problems
I am 63 years of age, own my home, work on a casual basis though not enough to pay tax and have approximately $350,000 in First State Super. Rather than seeing this money decreasing, would I be better off buying an investment property on the central coast for around $320,000-$350,000? There seem to be some very good buys. A.G.
Don't forget that super is not a fixed investment and you can invest in most funds within super that you can outside of super. First State Super offers a range of investments, including a cash fund that, according to the FSS website, has shown a higher return, 4.4 per cent over 12 months, than the Australian Equities fund, which has returned minus 4.7 per cent, or the default balanced fund, up 1.1 per cent.
If you wish to try and prevent your super from falling further, switch it into the FSS Cash fund by filling in a form that you can download or request from FSS.
From media reports and anecdotal evidence, I understand that central coast properties have not performed well. Economists are warning that 2012 is not shaping up to be a good year, worldwide, in which case I would be surprised if regional properties showed much growth, if any. So my suggestion is, no, don't withdraw your super and buy a property.
Seeking safety of term deposits
After working for 31 years, I retired three years ago and am now 58. At retirement I was offered a "package" and so I have not needed to access my superannuation, which remains with the Qantas Superannuation Fund Growth Option (approximately $900,000). I will not need to access the fund (or alternative option) until after I turn 60. My wife works part-time and is aged 55. My dilemma is, I am now at a point where I want some security with my future super earnings while the current state of the market and world events seem to indicate continued volatility. I am looking to move my super earnings from a super fund to a cash-style account or term deposit where volatility is negated. I want a return in line with current term deposit rates rather than the credit union "cash option". I am unsure if this option is available for me before the age of 60. I am not looking for an annuity type of fund I just want to control my funds without the vagaries of market conditions with their current considerable up and down movements. G.M.
You don't have to move your benefits out of super in order to access cash funds or term deposits. For example, your Qantas super fund offers a cash option, although this is only paying around 4.4 per cent a year.
That's fine as a temporary parking facility but if you want to abandon growth options, look at the Melbourne-based Defence Forces Credit Union (defcredit.com.au), which is offering higher rates for its accumulation and pension funds.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW 2026. Helplines: Banking Ombudsman, 1300 780 808 pensions, 13 23 00.
Frequently Asked Questions about this Article…
What is the Australian government deposit guarantee (Australian Financial Claims Scheme) and how does it protect everyday investors?
The Australian Financial Claims Scheme (AFCS) is the Commonwealth’s deposit guarantee for eligible bank accounts. It guarantees deposits held with approved deposit-taking institutions (ADIs), covering at-call and fixed-term deposits up to the applicable cap so everyday investors know their savings are protected if an ADI fails.
Which banks and financial institutions are covered by the government deposit guarantee in Australia?
The guarantee applies to all approved deposit-taking institutions (ADIs): Australian banks, building societies, credit unions and subsidiaries or branches of foreign banks. Everyday investors can check the full list of ADIs on the Australian Prudential Regulation Authority (APRA) website at apra.gov.au.
Does the government deposit guarantee cover term deposits as well as ordinary (at-call) bank accounts?
Yes. The AFCS covers both at-call (everyday) deposits and fixed-term deposits. The guarantee applies to the aggregated balance of an investor’s at-call and term deposits with the same ADI when determining coverage under the cap.
How did the deposit cap change from $1 million to $250,000 and what are the transitional rules for existing term deposits?
The Treasurer announced a reduction in the deposit cap from $1 million to $250,000. A transitional exemption was applied to term deposits that existed at the time of the announcement in September 2011: those term deposits continued to be covered up to $1 million until 31 December 2012 or until they matured (whichever came sooner). Term deposits rolled over before 1 February 2012 kept $1 million cover only until that date, after which the $250,000 cap applied. Deposits maturing after 31 December 2012 were covered up to $1 million until that date and then fell under the $250,000 cap thereafter.
Is the government deposit guarantee applied per person or per institution?
The guarantee is applied per person per institution (per ADI). That means the combined balance of your at-call and fixed-term deposits with a single ADI is aggregated to determine whether it falls within the guaranteed cap (for example, $250,000 after the change).
Where can I verify whether a specific bank or credit union is covered by the deposit guarantee?
Everyday investors can verify coverage by checking APRA’s list of approved deposit-taking institutions on apra.gov.au. That list shows which banks, building societies, credit unions and foreign bank branches are ADIs covered by the AFCS.
Can I move my superannuation into cash-style accounts or term deposits without withdrawing my super?
Yes — you don’t have to withdraw your super to access cash-style investment options or term-deposit-style options. Many funds offer internal cash options or term-deposit choices (for example, the article notes First State Super’s cash fund and the Qantas Super cash option). Switching investments inside your super fund can be a way to reduce volatility while keeping benefits within the fund.
Should I withdraw my super to buy an investment property with interest rates and market uncertainty?
The article’s advice to everyday investors was cautious: it recommended against withdrawing super to buy a regional investment property, especially given reports that some regional markets (such as parts of the Central Coast) had not been performing well and economists were warning of weak conditions in 2012. The columnist suggested keeping super invested or moving it into less volatile options within the fund rather than using it to buy property.
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