YOUR QUESTIONS

GOOD TIME TO MAKE A DEPOSIT

By InvestSMART · 8 Apr 2012

By InvestSMART ·
8 Apr 2012

Comments

GOOD TIME TO MAKE A DEPOSIT

I am a widow aged 61. My share portfolio at the moment is worth $120,600 and my cash account is $164,393. I get a widow's allowance of $447 fortnightly and also an English pension of #68 ($105) a week. I also draw $350 a month from my allocated pension. What is the best way to get the most from the cash I have? What is the best way to invest it? I don't wish to buy any shares at this time. K.S.

You are quite right. For now, as China slows and the prices of our main commodities, coal and iron ore, fall while strikes prevent BHP from meeting its exports, and Europeans watch nervously as Greece approaches its elections, I agree it's not a time to buy shares. In moments like this, I love term deposits!

SUPER TERM DEPOSITS BEST OPTION

In the six months to December 2011, we have seen our two allocated pension accounts reduce by a total of $33,630 $17,650 of this was for pension payments and $15,980 was fees and investment "earnings". The two fund balances now total about $550,000. Would we be better off to close these pension accounts and put the $550,000 into a five-year term deposit paying interest monthly? We receive a part age pension of $242.75 each a fortnight and have some good-quality shares worth about $110,000. Would our pension be reduced by moving from a super fund to cash? M.K.

I dislike taking benefits out of a tax-free environment when it is then no longer possible to re-contribute them. Also, term deposits outside of super are fully assessed by the Centrelink income test, unlike allocated pensions, which have a "deductible amount" that is ignored.

Many super funds have, as a result of clients' pressure, introduced term deposits into their super funds, for example Colonial First State and ING, while Defence Bank (formerly the Defence Credit Union) Retirement Savings Account pension deposit offers 5.35 per cent for six months.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Helplines: Financial Ombudsman, 1300 780 808 pensions, 13 23 00.

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Frequently Asked Questions about this Article…

Is now a good time for everyday investors to buy shares given current market conditions?

The article suggests caution about buying shares right now. It cites a slowdown in China, falling commodity prices (coal and iron ore), BHP export disruption from strikes and political uncertainty in Europe as reasons the columnist prefers to wait and consider safer options like term deposits.

What is a term deposit and why might it be a good option for my cash right now?

A term deposit is a fixed‑term savings product that pays a set interest rate for a specified period. The article recommends term deposits when markets look uncertain because they provide predictable interest income and capital stability compared with buying shares during volatile times.

Should I close my allocated pension and move the funds into a five‑year term deposit outside super?

The columnist advises caution. Withdrawing from a tax‑favoured super environment can mean losing future tax advantages and the ability to re‑contribute those amounts. Also, term deposits held outside super are fully assessed under Centrelink's income test, which can reduce age‑pension entitlements.

How will moving super into a term deposit affect my Centrelink pension or income test?

According to the article, term deposits held outside super are fully assessed by the Centrelink income test. In contrast, allocated pensions have a 'deductible amount' that is ignored for the income test. So shifting money out of an allocated pension into a non‑super term deposit could increase assessable income and reduce pension payments.

Do super funds offer term deposits so I can keep the money inside super?

Yes. The article notes many super funds have introduced term deposit options inside super following client demand. Examples mentioned include Colonial First State, ING and Defence Bank (formerly Defence Credit Union) offering term‑deposit style options within super.

What term deposit rates were mentioned in the article as examples?

The article cites a specific example: Defence Bank's Retirement Savings Account pension deposit was offering 5.35% for six months. Rates vary by provider and term, so checking current offers is important.

How can pension payments, fees and investment earnings affect my allocated pension balance?

The article gives a real example: over six months to December 2011 two allocated pension accounts fell by $33,630 — $17,650 because of pension payments and $15,980 from fees and negative investment 'earnings'. This highlights that withdrawals and charges can meaningfully reduce account balances over time.

If I don't want to buy shares right now, what are sensible alternatives for investing my cash?

The article recommends term deposits as a sensible alternative when you prefer to avoid sharemarket exposure. It also points out that you can find term‑deposit options inside super funds (to preserve tax advantages and Centrelink treatment) or outside super if you need more liquidity—bearing in mind the different Centrelink and tax implications.