Running a self-managed super fund (SMSF) means you have complete control over your superannuation investments. It also means making responsible investment choices to protect and grow your members' retirement savings. One investment option SMSF trustees often consider is a term deposit. This article covers some of the advantages and potential drawbacks of SMSF term deposits to help SMSF trustees decide if a term deposit may fit into their SMSF’s unique investment strategy and goals.
Key points covered
- What is an SMSF strategy?
- What is an SMSF term deposit?
- Benefits and considerations
What is an SMSF investment strategy?
An SMSF investment strategy is your fund’s roadmap for selecting, managing, and selling assets in a way that aligns with your investment objectives and retirement goals. It outlines the reasoning behind your investment choices and how these decisions are intended to help achieve your members’ long-term outcomes.
Superannuation laws generally require SMSF trustees to
- Develop and implement an investment strategy for the fund.
- Follow the strategy and review it regularly to make sure it remains appropriate.
You can read more about developing an SMSF investment strategy on the ato.gov.au website.
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. It involves placing a certain amount of your fund’s money with an authorised deposit-taking institution (ADI) for a fixed period.
In return, the ADI offers a fixed interest rate that remains unchanged for the entire term, regardless of any shifts in market rates, provided the term deposit is held to maturity. When the term ends (known as the maturity date), your SMSF receives the original deposit plus the interest earned. At that point, you may choose to either withdraw the funds or roll over the principal and/or interest into a new term deposit to continue earning interest at the prevailing rate on the rollover date.
Some SMSF term deposit benefits
Low risk with predictable returns
Term deposits are seen as low-risk investments. When you place funds in a term deposit, the interest rate is locked for a fixed period, meaning your returns are fixed (provided you hold until maturity), regardless of how financial markets perform. This can provide some stability for your SMSF, particularly if you're aiming to protect capital or against interest rate decreases during the term.
Australian Government Financial Claims Scheme (FCS)
SMSF term deposits are protected by the Australian Government’s Financial Claims Scheme. The FCS is designed to protect deposits up to $250,000 per account holder per ADI. An ADI deposit account held by the trustee of a superannuation fund on behalf of fund members is covered under the FCS up to the limit of $250,000. However, in most cases, the $250,000 limit would be applied to the whole fund, not each individual member.
Diversification benefits
Including a term deposit in your SMSF portfolio can offer a level of stability, particularly during periods when other investments may fluctuate. Term deposits may help to reduce the overall volatility of your SMSF’s investment mix.
Predictable income stream
As term deposits come with fixed interest payments, they may offer a reliable source of income (depending on how often you choose to have your interest paid out and provided you hold to maturity). This may support your SMSF’s cash flow planning, especially if your fund is paying a pension or planning for specific obligations or expenditures.
Some SMSF term deposit considerations
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Modest returns compared to higher–risk investments. While term deposits are considered relatively low risk, they tend to offer more modest returns compared to higher-risk investments such as shares.
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Liquidity. Once your SMSF funds are placed in a term deposit, access to the money can be restricted until the term ends. Early withdrawals typically come with penalties (unless financial hardship applies), making it harder to take advantage of potential new investment opportunities.
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Locked interest rate. If interest rates increase during the deposit’s term, your term deposit will remain locked into your original agreed rate, meaning that your SMSF may miss out on higher returns available elsewhere.
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