Self-funded retirees hit by falling interest rates

The decision this week to cut the official interest rate will further erode the income of term deposit holders, especially self-funded retirees, says National Seniors.

 

The Reserve Bank of Australia cut interest rates for the first time in 17 months from 2.5 per cent to 2.25 per cent.

 

National Seniors chief executive Michael O’Neill said seniors living off simple investments such as term deposits would be hit the worst.

 

“Seniors aged over 65 own 45.3 per cent of bank and financial institution term deposits and most of them are on low, fixed incomes,’’ Mr O’Neill said.

 

“Today’s cut simply means less money in the pockets of many, many retirees around Australia.”

 

He added that official deeming rates, used to determine age pension levels, have not kept pace with falling interest rates.

 

“What’s probably most concerning is that the cash rate is now more than a percentage point lower than the highest deeming rate (3.5%) and is close to the lower deeming rate (2%), making it more difficult to earn decent returns.

 

“It’s time to drop the deeming rates again,” Mr O’Neill said.

 

The news comes off the back of the RBA’s November 2014 Monetary Statement which highlighted that banks had reduced their term and at-call deposit rates leading to less competition. The report also said depositors were continuing to move away from term deposits as the interest rates on these products “continue to be less attractive in comparison to bonus saver accounts.”

 

“Term deposits are a preferred investment for many pensioners and self-funded retirees in particular because of the security and peace of mind they provide,” Mr O’Neill said.

 

Mr O’Neill urged older investors to shop around for the best rate, to be alert to maturing deposits, avoid automatic rollover of funds at a lesser rate and check that the term is right for their circumstances.

 

5 February 2015.