The Reserve Bank did its bit to hose down speculation of another imminent interest rate cut when it released the Minutes of its February board meeting last Tuesday. Describing the deliberations of the board in assessing whether to cut interest rates, it said in typical central bank language:
“In deciding the timing of such a change, members assessed arguments for acting at this meeting or at the following meeting. On balance, they judged that moving at this meeting………… was the preferred course.”
The market’s take on this was that the next rate cut was more likely to be in April or May, rather than March. Further, while one rate cut was almost certain, a second or third cut was less likely.
This is potentially good news to trustees, who have large sums invested in cash, or who are looking at the share market and thinking that at some stage, it will pay to take some profits and re-invest the proceeds back into the cash and term deposit markets.
APRA’s new prudential standard for bank liquidity (APS 210), which is just coming into operation, introduces the concept of a liquidity coverage ratio.
This will allow banks to treat most deposits from SMSFs as ‘stable retail deposits’, meaning that the rate paid on your SMSF cash account should be close to the RBA cash rate. The other impact from this standard is that banks should be keener to pay higher rates for longer-term deposits. In some cases, they will completely stop taking term deposits under 31 days. Breaking a term deposit early will also require a minimum notice period of 31 days, plus the payment of an administration fee and any interest rate adjustment (the latter could be in your favour).
As every SMSF keeps some cash on hand, making that cash work harder can only be a positive for member returns. Here is our latest review of the products offered by the banks (cash accounts and term deposits).
Most banks now offer tailored accounts for SMSFs (see below), which are fee free and can be used to make payments online. Some accounts require a linked working account to access full payments capability (for example, with another bank in the case of Rabo or ING, or within the same bank by St George/Bank of Melbourne).
However, if your SMSF has more than two trustees or two directors – you can’t open an account with UBank!
NAB’s SMSF Cash Maximiser Account pays interest of 3.05% if a nabtrade broking account or NAB Term Deposit is held in the same name. Of the other majors, Westpac with its integrated “two account” structure of a ‘working account’ and ‘savings account’ (the latter paying 2.70% on the whole balance) is better than the offerings from the CBA or ANZ.
If transactional ability is important, then it is hard to go past the major banks. The online banks (and some regionals) require a ‘linked bank account’ for making payments/transfers out, and don’t offer BPay. This can be somewhat self-defeating for an SMSF, as you will then need to maintain a second account with a bank that provides transactional capabilities, potentially incurring a monthly fee of up to $10 per month.
UBank has attempted to address this and a linked account is not mandatory. While it offers a ‘pay anyone’ facility, this is capped at $20,000 per day and payments in excess must be done via a linked account.
With bank deposits effectively government guaranteed up to $250,000, the interest rate is arguably the only consideration when it comes to term deposits. Known as the ‘Financial Claims Scheme’, the government guarantees deposits (including term deposits) of up to $250,000 on a ‘per account holder per financial institution’ basis. That is, your fund can have $250,000 in total with Bank A, another $250,000 with Bank B, another $250,000 with Bank C etc. – and all deposits will be covered by the guarantee. A financial institution includes banks, credit unions, building societies etc.
Of course, there can be the hassle of the account “opening process”. ING Direct is probably the standout with the easiest process here. One proviso – ask the bank about the notice they provide when your TD is set to mature and how easy it is to advise them of your new instructions. With some TDs set to automatically rollover into a new deposit of the same term at the standard rate (rather than the “headline” or “blackboard special” rate), the new rollover rate can come as a nasty shock to investors, who forget to advise their bank.
ING Direct, RaboDirect and UBank reward investor loyalty by paying an additional 0.10% pa when an investor rolls over the full amount of a term deposit to a new deposit term.
These are the latest term deposit rates. ME bank standouts – particularly its five-year rate of 4.00%, which is 2.02% higher than the five-year Australian Government Bond rate of 1.98%.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.