Managing your own super through a self-managed superannuation fund (SMSF) can give you more control over how your retirement savings are invested. With more freedom, many people look for ways to balance the growth of their retirement savings with some stability – and that’s where SMSF term deposits can come in. They can offer a sense of predictability with fixed returns that aren’t affected in a market experiencing falling interest rates. Everyone’s retirement goals are different, but SMSF term deposits can be a useful part of your strategy to manage cash flow and grow your savings as you head towards retirement.
Key points covered
- SMSF term deposits explained
- Some benefits and considerations
- SMSF term deposits and retirement planning
What is an SMSF term deposit?
An SMSF term deposit is broadly the same as a personal term deposit, although it is designed for SMSFs, not individual customers. SMSF term deposits, like all term deposits, offer a fixed interest rate, meaning that the interest rate is locked for the duration of the agreed term provided you hold to maturity.
The major difference between personal term deposits and SMSF term deposits is that only SMSF trustees can apply for an SMSF term deposit.
Some authorised deposit-taking institutions (ADIs) will also have a limit on the maximum number of trustees an SMSF term deposit customer can have.
For example, an ADI’s terms and conditions may specify that to be eligible to open an SMSF term deposit, you will need to be a member of an SMSF with between two and four individual trustees or, if you have a corporate trustee, it can have no more than four directors. You should check the relevant terms and conditions of your ADI term deposit provider.
While there's no requirement for your SMSF to include term deposits as part of its investment portfolio, SMSFs generally have more flexibility in selecting investment options compared to some retail or industry funds. Because of this flexibility, SMSF term deposits might be attractive if you're seeking a lower-risk investment option to help diversify your portfolio.
Some benefits of SMSF term deposits
Capital preservation
With fixed interest rates, SMSF term deposits can offer peace of mind. Your funds and rates are locked in for the agreed term length, meaning they won't be affected by sudden drops in the interest rate. This focus on capital preservation may make them appealing to those seeking more certainty, especially as they approach retirement.
Predictable returns
One of the key benefits of SMSF term deposits is knowing exactly how much interest you’ll earn by the end of the term (provided you hold to maturity). With a fixed interest rate, you may be able to plan more confidently for your retirement.
Cash flow management
Managing an SMSF includes keeping track of cash flow, like covering unexpected expenses. An SMSF term deposit may allow you to set aside money for specific needs, so it’s there when you need it. Some people use SMSF term deposits as a buffer to manage future payments and maintain liquidity.
Flexibility with term lengths
Not every retirement plan looks the same, and the same goes for term deposits. You can choose from different term lengths, whether you need a shorter six-month term or prefer to lock your funds in for a few years. This flexibility may make it easier to line up your term deposit with other SMSF investments or cash needs.
SMSF term deposit considerations
Limited access to funds and potential early break costs
Accessing your money early can come with break costs or other fees or penalties, and most ADIs require 31 days' notice before you can withdraw your funds unless financial hardship applies. Even with notice, withdrawing early may reduce the interest earned or your overall return unless hardship conditions are met.
No option to add extra funds
Once a term deposit starts, you can’t add more money to it. If you want to invest additional funds, you’ll need to either open a new term deposit or wait until the original one matures and top it up during the grace period (which is generally the 7 – 10 day period after a term deposit matures allowing you to change your maturity instructions, including adding funds to a rolled over term deposit). The terms and conditions across different ADIs will differ, so you may wish to do your research before committing to a provider.
Fixed interest rate for the term
A fixed rate offers stability, but it also means you won’t benefit from any interest rate increases during your term. However, it also means you’re protected from interest rate drops during the term.
Common ways SMSFs can use term deposits in retirement planning
Term deposits are often used as part of a diversified SMSF portfolio to balance higher-risk investments, such as shares or property. They can be particularly useful for trustees who prefer a more conservative or defensive strategy, offering a sense of stability to retirement planning, potentially alongside more aggressive investments.
Some SMSFs also use a strategy called term deposit laddering, where they spread multiple term deposits across different maturity dates. This approach may help improve cash flow and allow funds to become available at regular intervals, helping to manage the fund’s ongoing liquidity needs.
Important Information
© Judo Bank Pty Ltd ABN 11 615 995 581 AFSL and Australian Credit Licence 501091 (Judo). The Information on this page (Information) does not constitute personal, legal, investment, taxation, accounting or financial product advice, is provided for general information purposes only, and has been prepared without taking into account your objectives, financial situation, tax position or needs. It is subject to Judo’s disclaimer at www.judo.bank
Before acting on any Information, you should consider whether the Information is appropriate for you having regard to your objectives, financial situation and needs. You should seek independent financial advice and read the relevant terms and conditions and relevant product documents before acquiring any product.