Term deposits may continue to be a popular investment option for Australian investors but according to CANSTAR, the current low interest rate environment is making it difficult for those investors to break even after inflation and tax.
As evidence, Mitchell Watson, research manager for CANSTAR, pointed to the current average interest rate on 12-month deposits of 3.87 per cent.
"For savers on the most common marginal tax rate of 34 per cent though, this would see them barely break even," he said.
"In fact for an investment of $100,000 into an average 12-month term deposit, savers on the 34 per cent marginal tax rate would be ahead by less than $53 at the end of 12 months after taking tax and inflation into account.
"That, I suppose, is the price of security."
However the reality, according to Watson, is that investors are stuck between a rock and a hard place at the moment.
"The continuing share market volatility would seem to be making some investors nervous still, so despite the low returns, cash is popular," he explained.
"In recent years there has been significant growth in the overall dollar value of term deposits in Australia; Reserve Bank of Australia (RBA) statistics show that the dollar value of term deposits held with banks has grown from $196 billion in June 2007 to a current value of $545 billion.
"(But) based on the products we survey, the interest rate paid on a 12-month term deposit currently varies from 2.50 per cent to 4.30 per cent," continued Watson.
"And in this environment, that's a significant difference.
"Investors also need to consider other factors such as exit costs, the investment duration and anticipated changes in the cash rate."
Originally published on SMSF Essentials.
