SMSF Term Deposit Guide

When you self manage your superannuation balance, you can choose to invest in a wide range of products including (but not limited to) shares/securities, property, bonds, managed or mutual funds, precious metals, cash and term deposits.

Cash and term deposits are often used defensively within an SMSF portfolio to protect a chunk of your capital in case other growth assets (e.g., stocks) don’t perform as well as expected. That’s because term deposits offer a guaranteed, low-risk return. Banks will pay you a fixed rate of interest on your account balance provided you agree not to access the money for specific period of time—usually between 3 months to 5 years.

Some banks offer specific ‘SMSF term deposits’ with different rates or features, and these might also be called ‘Business term deposits’. However, banks may also offer SMSFs the same term deposit rates as any other eligible customer.

It’s important to note that cash management accounts aimed at SMSFs—the account where your employer and personal super contributions are deposited—usually pay interest on balances. These rates can be competitive, but are typically lower than term deposit rates (and lower than inflation), making it an attractive option to put your cash to work via a term deposit.

Not sure about how much to allocate to cash or term deposits? It’s wise to speak with a SMSF adviser or a licensed financial advisor for help to develop and execute a sound strategy.

Some level of cash allocation is a popular choice among Australian SMSFs. Of the $884.6 billion in assets held by Australian SMSF’s, ATO data shows the most commonly held asset types include listed shares (28%) and cash and term deposits (17%). Comparatively, institutional funds allocated 8.5% of total superannuation funds to cash, according to APRA’s September 2023 performance update.

ATO data on SMSFs shows funds with a smaller total balance (under $200,000) were more likely to allocate a greater percentage to cash and term deposits: around 40% to 45%, compared to less than 20% for funds over $1 million. Comparatively, SMSFs in the $1 million to $50 million range had more significant allocations to listed shares, listed and unlisted trusts, and non-residential real estate.

A volatile equities market since the pandemic, combined with Australia’s high interest rate environment, led many Aussies to stash their cash in term deposits rather than boost their super savings in 2023. SMSFs have the freedom to allocate their superannuation into term deposits at will—to increase the security of their retirement savings.

For the conservative SMSF investor, term deposits:

• Protect your money under the Australian Government’s guarantee on deposits. You can claim back up to $250,000 per account in the (unlikely) event your bank or credit union fails. This fail-safe covers accounts held by trustee/s of a SMSF, including term deposits, held with any Australian authorised deposit-taking institution (ADI).
• Provide certainty of returns, which can be highly attractive for SMSF investors in retirement. Especially given the anticipated high levels of volatility set to impact markets over coming years due to global recession risks and geopolitical conflicts.
• Support liquidity when the term length is short, which can be important for SMSF trustees who want to be able to draw down lump sums as needed but want to earn a higher rate of interest on cash in the bank. Stocks and real property are less convenient and reliable when it comes to making a low-risk return you can use to fund your living expenses.

When you’re comparing SMSF term deposits, the key factors to consider include:

• Interest rates: The returns you’ll earn on your cash depends on the interest rate you secure, which is why term deposits have been more popular in recent years as interest rates climbed.
• Interest payment options: A bank might offer different rates depending on how frequently you’d prefer to have your interest paid, e.g., monthly, quarterly, twice a year, or annually.
• Minimum deposit amount: A minimum of $5,000 is fairly standard.
• Low fees: Calculate all account-keeping costs before you commit. Also look into the fees and notice periods required if you desperately need to break the term to get your money sooner.
• Term length: You’ll be locking away your cash for a set time, so be sure you’re comfortable with the duration and have other income sources to draw on in the meantime. You could consider spreading cash across multiple term deposits with varying timeframes, to maintain cash flow based on the staggered maturity dates.
• Ease of application: And ongoing management. It will likely be simpler to access and manage term deposits via a bank where you already have a cash management account to hold your SMSFs contributions. Opening new accounts across multiple banks can be complex and require extensive paperwork to verify your SMSF details.
• Roll-overs: Unless you specify otherwise, or provide adequate notice, some banks will automatically reinvest your money into a new term deposit at maturity.

For comparison, a few SMSF term deposit interest rates on offer as of January 31, 2024.

While it remains your money, the cash stored in term deposits doesn’t offer instant liquidity in the same way a transaction/cash account does. You’ll pay a fee to withdraw your term deposit funds early, and you’ll also miss out on the interest returns.

When you invest via your SMSF, you have a legal responsibility to thoughtfully invest the fund’s capital wisely to support member’s retirement objectives, with due attention to returns, diversification and risk management. You’ll need to adapt to market conditions and regularly revisit decisions about:

• Whether term deposits continue to align with your investment strategy.
• How much to allocate to term deposits and which products.

There is always an opportunity cost when you choose components of a portfolio. Alternatives to term deposits with a similar risk profile include:

• High interest transaction and savings accounts.
• Cash (money market) exchange-traded funds (ETFs).
• Fixed income products like bonds and hybrids.

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