While many have praised Australia’s central bank for repeatedly cutting the official cash rate, in increments of .25 basis points each time, there is also a downside to their interventionist policy. The country’s official cash rate now stands at the 3 points after having been repeatedly shaved off, down to the lowest level since September 2009, or the apex of the global financial crisis, and there is talk of it going even lower. Of course, banks have been following the lead of the RBA and driving down their interest rates, albeit not all of them have implemented the cuts in full and many have done so reluctantly. But the policy toward interest rates applies across the board, both on loans, as well as on savings products. And the effects of lowering savings interest rates directly affect those who have already reached that stage in their lives during which they were planning to live out of that interest (as well as those who are soon going to).
Australian retirees have been living out of interest on savings accounts for decades now – basically ever since the implementation of the country’s three pillar pension system, which mandates businesses to allot a part of their earnings to the superannuation accounts of their staff. In turn, pensioners would save up in private funds, collect the accumulated interest, and proceed to invest it, thus supplementing their income. Nowadays, however, most investment funds are offering staggeringly low interest rates, which, at no more than 2 per cent per annum, stand below the country’s inflation rate of 2.2 per cent. Even the biggest industry superannuation fund in Australia is now only generating interest worth 2.6 to 2.8 per cent of the account balance.
Our research at Bankwest has revealed that this does not spell an end for savers and savings accounts, but simply a scenario in which cashing in on one’s savings takes more effort and time than before. Bankwest, for instance, offers a TeleNet Savings product, which comes with a 4.8 per cent variable interest rate. Of course, variable interest savings products fall into the relatively high risk category, but the actual surprise is that even low risk savings products, such as term deposits, can turn out to be much more efficient than cash fund investment options.
The problem with cash fund interest rates, says one economist with a major securities fund, is that the actual profit they generate is around 1.5 to 2 per cent. That’s because 3 per cent goes toward covering bill expenses and a further 1.5 per cent is the account management fee. Basic cash investment funds are clearly no longer doing what they were meant to do for the general consumer, yet term deposits such as those offered by Bankwest are rising in popularity and quickly moving toward replacing other, less profitable savings options. Not all banks are offering such products at the moment, but those that do accompany them with a sizeable 4 per cent interest rate – and the experts forecast that we’ll soon be seeing more of them offered by banks throughout the country.
The above-mentioned analyst, for instance, recommends that pensioners who plan to live out of the cash they collect from interest on their savings open not one, but several term deposit accounts. By taking advantage of interest roll-overs every three, six, and twelve months, they can enjoy more flexibility than with just one account. Another major advantage is that term deposits are virtually risk-free for people who know a time will come when they will have to rely solely on savings. They are both secure, as well as profitable – and while not all term deposits were created equal, shopping around online, in search of the best option available is not that much of a hassle, when it comes to financial security.