There has been a significant change in the way that Term deposit arrangements operate in Australia across the entire banking system. And what is more concerning it that it appears to have gone largely unnoticed by the general public despite written correspondence from the Institutions.
Clients affected by this change include Self Managed Superannuation Fund, Investors and Mum and Dad clients who use Term Deposit arrangements.
The change only applies to Term deposit arrangements that were commenced or reinvested after 31 October 2014.
- From now on, you will be required to give 31 days’ notice to access a Term deposit arrangement prior to maturity.
- If you have less than 31 days until maturity, you must wait until maturity
- The entire Term deposit, (where the 31 day rule is exercised) will be closed as there are no partial redemptions allowed
- There is some flexibility to allow earlier access in the case of financial hardship
On the surface this does not appear to be of great importance or have any impact on most clients. However, where you are holding reserves of cash in Term deposit arrangement to potentially buy in to the markets during a dip, you may be significantly impacted by this rule change.
In effect, where a dip occurs in the market, you must wait 31 days (Or less if maturity is less than 31 days) until you can invest those cash holdings in to the markets.
Clearly, holding significant amounts in a Cash Management Account is deleterious. Most cash management accounts are offering somewhere between 2.5 and 3% per annum. Equally, running down your cash account in favour of Term deposit arrangements could impact you because of the time required to access those funds in future.
LifeTime Financial Group has developed a couple of strategies to deal with this potential issue.
Generally speaking, we propose that clients;
- Hold sufficient funds in their primary cash management facility to meet cash flow requirements
- Hold an amount in a high yield cash account (Currently paying around 3.20%) and
- The balance to be held in multiple smaller Term deposit arrangements. This will avoid breaking a larger term deposit in its entirety where you required access to less than 100% of the total amount held in the Term deposit arrangement.
We note that the above comments are our view of the changes recently implemented and should not be under circumstances considered as advice. Where you do require advice in relation to the recent changes to Term Deposits and how this will affect your financial planning requirements, please do not hesitate to contact us on 03 9596 7733.