If you’re looking for a low-risk, stable way to grow your super, a self-managed super fund (SMSF) term deposit might be a suitable option. SMSF term deposits can offer secure and stable growth, which may be appealing if you prefer to avoid the ups and downs of riskier investments. This article walks you through how term deposits can work as part of an SMSF, the benefits they can offer, and some key considerations.
Key points covered
- SMSF term deposits explained
- Key benefits
- Important considerations
How SMSF term deposits work
An SMSF term deposit works just like a regular term deposit. You lock away a portion of your super for a set term length, earning a fixed interest rate that doesn’t change, no matter what happens in the market (provided you hold the term deposit to maturity).
With SMSF term deposits, typically only SMSF trustees can apply. Some authorised deposit-taking institutions (ADIs) may have other conditions, like requiring the SMSF to have between two and four individual trustees, or a corporate trustee structure with no more than four directors.
Since SMSFs may allow investment in a wider range of investments than other types of super funds (like industry or retail super funds), term deposits may be an option to keep part of your super secure while you potentially explore higher-risk options with the remainder of your super.
Benefits of SMSF term deposits
Stability and security. Term deposits can offer predictability in your super portfolio. Unlike investments tied to market performance, a term deposit provides a fixed return if you hold to maturity, so you should be able to work out what you’ll earn.
Peace of mind for retirement. As you approach retirement, safety becomes more important. Term deposits offer a level of certainty – you know your returns won’t be affected by sudden drops in interest rates in the market after you’ve locked in your rate, potentially making it easier to plan for your future.
Financial Claims Scheme protection. In Australia, term deposits with ADIs are covered by the Australian Government Financial Claims Scheme (FCS), which is designed to protect up to $250,000 per account holder, per ADI.
Flexible term options. You can choose term lengths that suit your financial strategy. Whether you prefer a short-term option (like six months) or want to lock in a long-term deposit for several years, term deposits offer flexibility to match your goals.
No bonus rate criteria. Unlike high-interest savings accounts that often require you to meet certain conditions (like minimum deposits or no withdrawals) to get the highest rates, SMSF term deposits can offer market-leading fixed interest rates upfront.
SMSF term deposit considerations
Limited access to funds. Once your money is in a term deposit, it’s generally locked away until the term ends. If you need to access the funds early, you may face early withdrawal penalties (e.g. a reduction in the funds you receive back). It’s important to make sure you won’t need this money in the short term before putting it into a term deposit.
Interest rate movements and market conditions. This savings product provides a set interest rate for a set term for your funds. Accordingly, you should consider factors such as whether interest rates are likely to fall or rise before you invest and general economic conditions. As an investor, it's your responsibility to observe and manage the risks for your investment portfolio.
Legal responsibilities as an SMSF trustee. As an SMSF trustee, you have a legal duty to manage the SMSF in the best interests of its members. This includes considering whether the investments you choose, like term deposits, align with the members’ goals and overall strategy. [RL4] [AP5]
When it comes to SMSFs, you’ll need to regularly review your decisions. This may include asking:
- Do term deposits still fit with your overall investment strategy as market conditions change?
- How much of the SMSF’s money should be placed in term deposits versus other investments?
- Are there specific term deposit products that offer the best balance between returns, security, and flexibility?
Important Information
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