With the impacts of COVID-19 still being felt across the world, those looking to protect their money in a safe and secure investment continue to face a lower yield environment. Even before the pandemic, we’ve had historically low interest rates in Australia for several years now. The official cash rate is sitting at 0.1% since December 2020~1, with it being conceivable that rates will remain quite low for a few years to come.
This can be something that those seeking loans for property or business might be celebrating. But it’s the savers and income investors who are facing ongoing instability when it comes to generating an income from their savings.
For the short term, it’s difficult for investors to generate any noticeable returns on their savings. What options are available for those seeking better returns without taking excessive risks?
Risk versus reward when seeking higher returns
Term deposits and high interest savings accounts have historically been some of the popular options people opt for when saving for the short term or when they need to ensure their capital is maintained.
In the current environment, term deposit interest rates offered by the banks are extremely low, making it much harder to earn a steady income.
Currently, term deposits rates from the Big 4 Banks are lucky to sit within the range of:
|Term||Indicative interest rate (p.a.)|
|1 year||0.20% – 0.30%|
|3 years||0.20% – 0.35%|
|5 years||0.20% – 0.35%|
It can be tempting to consider some of the high-yielding investments such as shares, property and mortgage funds but with higher yields comes higher risks. This is not to say these options should be ruled out altogether but you need to be extremely cautious in going down this path.
So, what are the ‘safe’ options available that may provide better returns than a term deposit? We look at two options.
A fixed term annuity provides a regular and guaranteed income for a fixed term (usually between 1 and 5 years) that you can choose. The income can be paid monthly, quarterly, half- yearly or yearly.
The annuity is not reliant on share market performance as the returns are guaranteed by the product issuer (usually a life insurance company). At the end of the term, you can choose to have all the money return to you or rollover to another annuity. Some people may want to draw down on their capital and have this paid out as part of their regular payment, in which case the account balance will reduce to zero at the end of the term.
Once the annuity commences, the payments are fixed (you can’t change the amounts) and your money is generally locked away until the end of the term.
Interest rates for annuities vary, but at the time of writing, the following interest rates was on offer where the capital is returned at the end of the term and income is paid yearly.
|Term||Indicative interest rate (p.a.)|
|3 years||1.20% – 1.40%|
|5 years||1.40% – 1.90%|
It’s important to note that, unlike term deposits, annuities are not covered by the Australian Government’s guarantee on bank deposits (of up to $250,000).
The other option that many savers and investors may consider when looking for relatively secure income and capital returns are bonds.
When you make the choice to invest in bonds, you’re essentially lending money to a company, government or semi-government body. In return, you receive interest payments at regular intervals, and when you hold the bond to maturity you get back the face value of the bond.
Investing directly into bonds can be difficult and complex for those not familiar with how they work. An alternative to investing directly is to use a managed fund which pools your money with other investors to invest in a portfolio of bonds. The portfolio is managed by a professional fund manager for which you pay a fee for their service.
Below is past performance for a range of managed funds that invest in Australian bonds. Note that past performance is not necessarily a reliable indicator of future performance, but it does give you some ideas as to what can be achieved.
|Performance period||Indicative past returns (p.a.)|
|1 year||-0.60% – 6.24%|
|3 years||0.85% – 6.56%|
|5 years||1.72% – 5.32%|