Accounts you can use daily
When you retire you will still have bills to pay, so it’s important to have an account that is easy to access.
Banks, building societies and credit unions offer various accounts that can be used for your daily banking needs. These may include cash management accounts which may offer higher interest rates depending on the amounts in the cash management account or other conditions.
For detailed information ask these institutions for a brochure. Check for information about how fees are charged to the account. For example, you might get a certain number of free withdrawals per month.
Many institutions offer cash accounts that can only be accessed via the internet or telephone and which pay higher rates of interest than other at call accounts. You should investigate what special conditions and restrictions apply to these accounts.
Deeming accounts
Most banks, building societies and credit unions offer deeming accounts. Some only allow age and service pensioners to open deeming accounts. Others offer them to all retirees aged over 55, while some allow people on other social security or Veterans’ Affairs payments to open them.
Deeming accounts are at call accounts where the interest rates are generally based on the social security deeming rates. Different institutions may pay different interest rates, depending on the balance in these accounts.
Term deposits
Term deposits are fixed interest accounts offered by banks, building societies and credit unions.
Term deposits are considered high security investments with relatively low risk. A term deposit’s security lies in the security of the institution with which you are investing.
How term deposits work
Duration: Short to medium-term investments. Your money is locked in for the agreed term and is usually not accessible during that time. Your money is not readily available in an emergency. Penalties for withdrawal before maturity may apply.
Fees: No entry, exit or annual management fees. All costs have been taken into consideration when setting the interest rate offered.
Returns: A guaranteed rate of return for a set period of time, regardless of changes to other interest rates during that period.
Interest: Calculated daily and paid monthly, quarterly, six-monthly, yearly or at maturity. If you choose to have interest paid frequently, a slightly lower interest rate may apply. You may have the interest automatically reinvested, paid into another account or paid to you by cheque (a fee may apply for payment by cheque).
Tax advantages: There are no tax advantages.
Capital growth: There is no capital growth.
Minimum investment: Usually a minimum of $500.
[ top ]
Fixed interest investments
Fixed interest investments give a known amount of income paid in regular instalments for a specified time.
There are various types of fixed interest investments with different terms, conditions and levels of risk. They are available from finance companies, public companies, federal and state governments, government business enterprises, banks and financial institutions.
How fixed interest investments work
Duration: Variable term investments of up to 10 years. Your money is usually not available until maturity and is not readily available in an emergency. If the investment is sold before maturity, you may incur a taxable capital gain or loss.
Fees: Usually no entry, exit or management fees are charged if held to maturity.
Returns: A set interest rate for a fixed period of time is contracted, regardless of changes to other interest rates during that time.
Interest: Calculated daily and paid periodically or at maturity. If you choose frequent payments, a lower interest rate may apply. Interest may be automatically reinvested, paid into an account or paid by cheque.
Capital growth: There is no capital growth if you hold the investment to maturity.
Minimum investment: Usually a minimum of $1 000.
Types of fixed interest investments
Debentures—are usually issued by finance companies. They are secured by some or all of the assets of the company which can include mortgages against loans which have been provided. Many finance companies are wholly owned subsidiaries of banks or listed companies but now many are owned by Solicitors’ businesses that formerly provided First Mortgage loans and some developers who raise money for their own real estate developments.
Unsecured notes—are a higher risk investment than debentures as they are not specifically secured and funds are usually available at call. The interest rate offered is usually higher and variable and provided as an alternative to debentures by similar companies.
Bonds—the level of security varies with the offering institution. They may be guaranteed by the Australian Government, state government or by a company listed on the stock exchange. Some banks offer bonds that have the same level of security as bank accounts.
Bank bills (discount securities)—are short-term fixed interest investments offered by banks, companies and other institutions. Terms range from 7 to 180 days. Bills are purchased at a discount to face value which means that if you own a $100 000 bank bill you would have paid less than $100 000 and will be paid the $100 000 on maturity.
Security and risks
The level of security depends upon the type of investment and the financial stability of the institution offering it. Some institutions may have a credit rating to indicate their security. For example, AAA is the highest rating available and means that the institution is considered more secure than one with an AA or B rating. This is a guide only and does not guarantee the return of your money.
Taxation on interest bearing investments
Interest earned and other distributed income is fully assessable in the tax (financial) year in which it is earned. Depending on your circumstances you may be liable to make Pay As You Go (PAYG) instalment payments. You are only liable if the Australian Taxation Office (ATO) has sent you a written notice informing you of an instalment rate.
Investments with a term of more than 12 months and interest paid at maturity are subject to tax on a portion of the interest in each financial year. Many financial institutions send a statement each year so you know how much income and where to include it in your tax return.