Managing the Government Guarantee on Term Deposits as an SMSF Trustee


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SMSF trustees are able to take advantage of cash accounts backed by the Federal Government’s Financial Claims Scheme (FCS), commonly known as the government guarantee, to improve the security of their capital and achieve good levels of interest.

In 2012 the Government announced the guarantee on deposits was to be reduced to a $250,000 cap, down from $1m cap in place since 2008. The lower limit is a concern to many SMSF Trustees given that it reduces competitiveness between the Big 4 banks and smaller the regional banks and the building societies.

The initial reaction especially for the risk averse was for Term Deposits larger than the cap to drift back to the CBA, ANZ, Westpac and NAB, given their much higher credit ratings. They have capitalised on the move and as a consequence we see lower term deposit rates from the Big 4 for amounts more than $250,000 since February 2012.

So what strategies are available to retain the government guarantee and to secure the higher interest rates.  Here are some ideas for the SMSF Trustees and Self funded Retirees to consider:

  1. Do your research on your target providers and consider if the guarantee is really needed. If you are willing to take the risk on the solid backing of many of Australia’s financial institutions. If you are happy with them then you may just opt for the highest interest rate paying one and don’t be afraid to ask them to get you a better deal than advertised as you can get 0.05 to 0.2% by asking! It all adds to your bottom line so don’t be shy.
  2. If you have more than $250,000 to invest, you could split your investment between a number of providers. At www.ratecity.com.au and www.mozo.com.au  they give you details of a number of different institutions such as ING DIRECT, ME Bank, Greater Building Society and Rabobank. Don’t be afraid of these names not being too familiar, they have the guarantee! You could split deposits across 3-4 institutions as well as your current Big 4 favourite and maintain the guarantee on your portfolio.  It does involve a bit of work to set up initially but if you’re wanting a government guarantee, then it’s worth the initial effort, think of it as an Insurance policy application!
  3. The added benefit is that should you need access to some funds urgently then you may only have to break one of the Term Deposits instead of previously breaking the one large one and incurring Break Fee, which we all hate. You may stagger the terms to ensure even more flexibility.
  4. Now you may not be comfortable with this one as the level of knowledge about this sector is not great among individual trustees but you might consider buying some bonds for a higher return. By investing lower in the capital structure in those well-known banks where you are confident that they will continue to trade, you can pick up a higher return. While senior bonds are higher risk than term deposits, the main benefit they have is that they are liquid and can be sold very quickly.
  5. Yields on Australian dollar bonds are not great at the moment as market expectations for a low growth world economy spreads with the IMF this week reducing forecasts even further. Your adviser or fixed interest broker can guide you towards the better risk and decent yielding bonds and you can expect 2.5 to 5.5% for what I would consider suitable risk for a moderately conservative investor if well diversified.
  6. Don’t chase a guarantee or safety to far and limit exposure to underpaying securities like the 10-year government bond, 2.58 per cent. For $50,000, some of the best-paying, three-year term deposits with the deposit guarantee are paying in excess of 3.2 per cent.
  7. If you want diversity without the extra paperwork think about outsourcing this sector to a professional fund manager like Macquarie Income Opportunities Fund. Schroders or Henderson also have decent offerings in this conservative end of the sector. Look for a mindset in a Fund Manager that sees Capital Preservation as a core to their strategy.
  8. Instead of lending to the bank, buy the bank or at least blue chip shares that provide decent dividends. Buy no more than a handful of reliable blue-chip stocks that pay a regular dividend and are forecast to continue to do so through thick and thin. These should be “bottom drawer” stocks. If you have only got a small part of your wealth invested in them then you can afford to let them ride the volatility but you still need to watch their sector for any major changes (think Blockbuster video demise after online streaming). I am talking about the 1 or 2 banks, the consumer staples like Wesfarmers and inflation linked income companies like APA Group which owns Australia’s largest natural gas distribution and storage infrastructure network, constituting mainly gas transmission and distribution, mostly servicing power generation, industrial, and commercial customers.

All to0 hard? Well at Verante Financial Planning we have access to a facility that can access over 20 Term Deposit providers in one place with a one-off application form and easy transfer from institution to institution at maturity for the best rates.Have a look at Australian Money Market

In summary it appears most people are unsure about the future and want guarantees on their investments while on the other side younger people don’t want to take on additional debt at this time. This means we’re likely to see rates remain low for some time. By doing some research and comparing what’s available in the market and maybe seeking advice for a second opinion you can find the Term Deposit that suits your needs.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Image courtesy of Stuart Miles at FreeDigitalPhotos.net

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1 Comment

  1. Thanx for good post on your blog! I’ll be back soon.

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