Term deposits – saving with the safety wheels on

17 February 2017

Term deposits – saving with the safety wheels on

Whether it’s saving for a new car, school fees, new home, or supplementing income in retirement, saving is a necessity for many of us. With the money just about spent before we’ve managed to save it, how do you minimise risk and maximise returns? Term deposits could be what you are looking for.

While the spotlight has been on mortgage rates, a recent Canstar review found that term deposit rates, on average, have largely remained unchanged from 12 months ago, even in the face of a 75bps drop in OCR over this time. So although we’re not experiencing the higher rates of 2011 (in February 2011 the average rate for a 12 month term deposit was 5.04%), returns on our investments, have been steady (today’s average rate for a 12 month term deposit is in the region of 3.80%).

Canstar general manager Jose George comments:

“There have been small, sporadic increases to savings rates in recent months but in general, these increases have not been sustained. Savers should shop around to get the best available rates or even consider splitting their investment across a number of different terms to gain maximum benefit.

People should also remember that their effective return will need to factor in inflation, currently sitting around 1.30%. Any rate above inflation, you stand to gain, even after tax.”

What you should consider when looking for a term deposit

It’s always pleasing for savers to see a good rate on a term deposit but, chances are, you will benefit from higher returns if you remember a few simple rules and shop around.

• Negotiate, negotiate, negotiate. A lot of people do not realise that there is quite often a better deal to be done. If you already have investments or accounts with the provider, or you are looking to invest a large sum of money, a higher rate of return can often be available.

• Rates are usually advertised ‘per annum’, not the term of your deposit. So, if your term deposit is only, say, six months, adjust your calculations accordingly to see what kind of returns you can expect.

• Check your provider’s term deposit terms and conditions. This document is a guide to the terms and conditions of your term deposit. It should also give details of how the interest is calculated and any conditions or penalties you may incur if you withdraw the deposit early.

• What’s your tax rate? If you are on a 30% or 33% tax rate, speak to your provider. A PIE fund investment, which attracts a maximum tax rate of 28%, may be a more beneficial investment option for you.

George continues:

“Term deposits can be a good investment as part of a diverse investment portfolio. They can also work for cautious investors or people who need to guarantee their returns, such as retirees.

“At risk of singing the same tune, research is essential before you invest. Promotional and special rate deals will be made available by banks from time to time and the easiest way to keep track of these are through the use of comparison sites like canstar.co.nz.”

The top rated provider

For the fourth consecutive year, Kiwibank has been named Canstar’s Bank of the Year – Term Deposits.

Accepting the award, Amanda Jenkins, Product Manager, Investments said:

This is great accolade for Kiwibank. Term Deposits still provide a reasonable return and are typically viewed as relatively ‘safe’ investments. They also offer regular income for customers who request interim interest options and for many people this provides a good top up to other income.

We’ve tried to simplify our online investment opening process and we’re continuing to improve this for our customers. We’ve certainly seen numbers of online investments increase – nearly 40% of our investments now occur online – and we feel this reflects customer’s ease of use and growing comfort around self-service.

For further information and a full list of Canstar Five Star Ratings for term deposits, 2017, please visit the Canstar website.

ENDS

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