At Moneyworks, we help our clients to manage their KiwiSaver accounts and for many of our clients to build an investment portfolio. The investment portfolio is usually designed to provide them with assets to live off in retirement.
For a number of our clients, we also advise them on their portfolio of term deposits, which they hold both within and outside their Investment portfolios. While managing your term deposits might seem easy, there are a number of things that you can to to optimise your returns. We have outlined these below:
1. Diversify your financial institutions/banks.
Depending on the amount that you have to invest, you may have more bargaining power with a bank, and that may get you a slightly higher interest rate. But check out the level at which this 'utility' vanishes. If you have $100,000 will you get a much better rate than if you have $50,000? Research the different rates your financial institution will give you.
By using different financial institutions, you are spreading your risk around. Refer to the following blog article for more information on why you would want to do this. How safe are your New Zealand Term Deposits?
2. Diversify your maturity date.
We adviser our clients to have different maturity dates. While this can be more work at the start and on an ongoing basis, it means that the investment and financial environment is different when each investment matures. This gives you the opportunity to choose different time periods of investment, at the start and on maturity. Generally, the longer the term deposit, the better the return.
With a number of our clients, we advised them to put some of their term deposits into 5 year term deposits at the end of 2014. This gave them returns of 5.50% - 5.85% with AA- rated financial institutions. These long term rates have dropped significantly since then.
3. Be aware of when the interest is paid on the investment
Interest rates will be quoted as either compounding quarterly (where you earn interest on your interest, as the interest is reinvested), paid annually, paid at maturity, and variations in between. This is usually in the FINE PRINT. But it is very important that you know when you are going to get your interest. It makes a big difference in the return that you receive. As an example, as of today, here are three different investments you could make:
|Interest Rate||Paid||Value of $100,000 at the end of two years|
4. Use Tax Effective Structures.
If you are investing through a Trust or you earn in your own name and earn over $48,000 per annum, you can get tax benefits by using a PIE Term Deposit. Many financial institutions offer these investments, with the same interest rates, but with a tax rate of 28% (instead of 30% or 33%). This can make an effective difference to your income.
5. Make sure that you plan well.
With recent changes in Australia, with the Australian Prudential Regulations Authority introducing a liquidity ratio, most Australian owned banks have introduced a 31 day notice period for term deposit withdrawals in Australia. Most of these banks have implemented this requirement in New Zealand as well. Therefore, don't count on being able to 'break' your term deposit easily. If you think you are going to need cash, hold those funds in a cash account.
For more thoughts on Term Deposits, have look at this interesting article in the NZ Herald by Diana Clement
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