Term deposits not the best option for SMSF trustees

Term deposits may not be the best option for self-managed superannuation fund (SMSF) trustees nearing the pension phase who want to ensure liquidity, according to HLB Mann Judd.

HLB Mann Judd Sydney head of wealth management, Michael Hutton (pictured), said that trustees needed to keep an eye on cash flow to ensure they could make pension payments. Hutton said retirees tended to focus on returns and how long their savings would last, often overlooking the need to have cash readily available to make regular pension payments. As such, they could incur unnecessary costs through liquidating assets.

“Trustees need to understand that some fixed interest investments are more liquid than others, and even similar assets such as term deposits issued by different financial institutions can pay interest at different times,” he said. “It is why we advise trustees with a SMSF in pension mode to keep at least one year’s pension in cash – and that includes separating it from term deposits so that it is always accessible.”

Hutton noted the increased popularity of term deposits, which have grown to $2.3 billion compared to $1.8 billion in February 2009. While pensioners may rely on interest paid from various term deposits to make pension payments, cash could be tied up in them until after the end of the financial year, resulting in a cash shortfall, he said. Therefore, term deposits were not always the best approach for SMSFs, Hutton added.