Saving SignWe note that deposit rates at banks have receded recently in the wake of the decision by the Reserve Bank to reduce the Overnight Cash Rate by 0.5%. We are also hearing that banks are finding it difficult to expand their lending at present. This all points to deposit rates remaining low, and maybe going lower, for the remainder of 2011.

At current levels money on deposit at banks is losing value. If we look at a rate of say 4.6% for 12 months the return after tax (at an average rate of 25%) becomes 3.45%. Inflation for the year to December 2010 was 4.0%. Given the expected persistence of the effects of the GST increase and recent food and fuel price inflation we expect inflation for the next 12 months to remain in the 3.0-4.0% band. This means a loss of real purchasing power.

While there is a role for retaining some funds in the bank there is a real cost to doing so at the present point in time. We hear concerns about the safety and security of other investments. These are not without some foundation but are somewhat exacerbated we feel by recent geological and political events. We are continuing to find a reasonable number of sound ways to obtain returns that are better than those at the Bank. Please ring us on 07 578 3863 or 0800 867 323 if you would like to improve your returns.

Question

My husband and I have just invested $20,000-00 for 6 months with our bank - the money we will use towards a deposit in purchasing a house. But a friend asked her insurance broker from Sovereign to call us to help organize a pre approved loan - this broker is advising he can help us get finance soon but we would have to break the deposit.

Is this a wise thing to do - the broker advised the prices of housing is ok right now and we shouldn’t wait for our investment term to expire. We are also saving to add to this in the meantime?

Men running with laptopsThe following is a simple comparison between a 90-day term deposit and the Lifetime Income Fund. The scenario is a 65 year old male (Bob) with $100,000 invested in term deposits and is drawing down 5% per year. Bob is in good health and has a personal tax rate of 17.5%. He uses the draw-down to supplement NZ Super to meet everyday expenses and has additional savings of $300,000.

Bob would be better off in the Lifetime Income Fund than in TDs. Assuming term deposit rates don't increase.

The Cash PIE term deposit rates (1 year) as quoted by interest.co.nz (25th March 2016), highest investment band.

Provider 1 year
ANZ 3.25%
ASB 3.25%
BNZ 3.40%
Westpac 3.25%

Using a simple average across all providers, less tax at 17.5%, to give a net return of 2.71%. We apply a draw down rate of 5% and an earning rate of 2.71% at age 65.

Term deposit earning 2.75% net drawdown

Using the same approach with the Lifetime Income Fund, which like the term deposit is liquid and licensed by the RBNZ. The Lifetime Income Fund has a higher expected earning rate of 3.68% after deduction of fees and PIE tax and guarantees a draw down rate of 5% for life.

Lifetime Income Fund net drawdown

Comparison results

Comparison Lifetime Income Fund vs 2.71% Term Deposit

Learn more about the Lifetime Income Fund

How is Insured Income better than just withdrawing money from a Term Deposit?

Insured Income (available from Lifetime Income Fund) is similar to a Term Deposit in some ways and different in others. Both investments have their pros and cons.

Let's start with Term Deposits.

While Term Deposit rates are forecast to be low for some time they remain a good investment. Term Deposits are not without risk however. Unlike in most developed countries, term deposits in New Zealand are not insured or guaranteed. In the event of a bank failure, your investment could be used for the greater good. Click here to read more on the Reserve Bank's site.

Picture showing what happens in event of a New Zealand bank failure

Term Deposits also pay out interest infrequently; usually quarterly, semi-annually, or annually. This reduces cash flow and makes it harder to budget on a weekly or monthly basis. Lastly and importantly, once your savings in a term deposit have been fully drawn down, your income stops.

lifetimelogoInsured Income (Lifetime)

Lifetime enables you to turn a lump sum into a regular income that's insured for life.
Income payments are paid fortnightly and always remain the same, even if markets fall.To offer an income guarantee, the Reserve Bank requires Lifetime to set aside capital reserves to account for each and every investor. These capital reserves ensure Lifetime can honour its future obligations. Individual investors capital cannot be accessed in the event of a financial crisis.

Lifetime’s income payments are paid after-tax and continue for as long as you live, even if your original capital has been drawn down to zero. Term Deposits and Lifetime are investments that cater to different needs. Term Deposits are designed to help you save and Lifetime is designed to help you live. Lifetime addresses longevity risk (how long will you live?) and market risk (irregular income), term depoists do not.

Try out Lifetime's new comparison calculator to decide what combination is right for you,


The information on this site is intended as a guide only. The information is of a general nature and does not and cannot ever constitute personal advice.
© Copyright 2009-2017 Bay Financial Partners Limited |  All Rights Reserved.