From 1 January 2015 Australian banks and financial institutions are required to maintain sufficient liquid assets to ensure they can survive one month in a financial crisis. The aim of this change is to strengthen our financial institutions and improve their resilience to short-term liquidity stress. The impact on investors has been a tightening in the conditions regarding access to money invested in term deposits.

What does this mean for you?

Typically, the benefit of a term deposit is that it provides you with a higher rate of return when compared to a cash account - if you are willing to forego access to your funds for the agreed term. Previously, you were provided with a safety net that allowed you to withdraw funds from your term deposit investments at any time. In return, you would be required to pay an administration fee and an interest rate adjustment.

However, as part of the new regulatory framework, investors who establish or reinvest their term deposits after 31 October 2014, must now give their bank 31 days’ notice if they need to access their money prior to the maturity date. Customers can submit a financial hardship request to retrieve funds earlier but this may be declined depending on individual circumstances.

This could create potential problems for investors should they urgently require access to their funds.

When combined with the historically low cash rate of 2% pa; term deposits are now being viewed as a less favourable investment with many investors turning to other options. Say, for example, you invest $10,000 into a 12-month term deposit at a rate of 2.9% pa. This would pay a return of $290 pa. Given the current inflation rate of around 1.3% pa, your real rate of return would be around 1.60% pa or $160 per annum.

Are there other options?

As an alternative to investing solely in defensive assets, investors could consider diversifying some funds into growth-based investments such as shares, managed funds or property. These types of investments are considered higher risk but can potentially provide higher returns. Before moving into growth-based investments it’s important to understand the trade-off between risk and return and be comfortable with possible negative returns over the short term.

Your financial adviser can determine your tolerance to risk, review your current portfolio and, if appropriate, provide you with information on any suitable alternatives. Furthermore, your adviser will warn you of any maturing term deposits well in advance to ensure you are given the opportunity to withdraw funds upon maturity if required.

Investors without a financial adviser will need to do their research and, in the case of an emergency, ensure they have sufficient cash reserves to cater for at least one month’s expenses. Should earlier access to term deposit funds be required, they will need to contact the product provider and complete a closure request.

Please note: General Disclaimer Warning The information provided in this bulletin is general information only. It has been prepared without taking into account your individual objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information, having regard to your objectives, financial situation and needs. We can assist you in determining the appropriateness of any product or information mentioned in this bulletin. You should obtain a Product Disclosure Statement relating to the products mentioned herein.

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