The Reserve Bank of Australia (RBA) recently announced an unprecedented reduction in the official cash rate of 0.25% to 1.00%, which is the lowest on record.
This will have implications for cash returns on fixed interest investments such as term deposits which are often a significant portion of a Self-Managed Superannuation Fund (SMSF) investment portfolio. It will also impact on self-funded retirees who have assets outside of superannuation.
Whilst most banks and financial institutions have factored in these rate cuts to some extent, the full impact will be felt once existing term deposits come up for renewal.
There is some debate among analysts around what economic changes can be expected over the next 12 months. Many commentators are predicting a further rate cut of at least 0.25% this calendar year with further consequential effects on cash investment returns.
The future is bright for SMSFs, however these lower cash returns may result in slower growth of some superannuation balances and, for those in pension phase, the possibility of having to sell assets to meet minimum pension withdrawal standards.
Cash assets are traditionally seen as being more capital secure than growth investments (such as shares) but in a very low interest rate environment there are risks of erosion in the real value of cash based investments (i.e. where returns are less than the inflation rate).
Trustees of a SMSF would be wise to review their existing investment strategy, particularly in regard to target asset sector allocations (fixed interest, equities, property, etc.). Any changes to an investment strategy should take into account relevant considerations such as; a member’s age, immediate plans for their SMSF, whether the fund is in accumulation or pension phase, risk appetite of the members, the need for diversification of investments and liquidity requirements. Trustees should considering seeking professional advice to assist in this process where appropriate.
Bob Locke – CA SMSF Specialist – CEO of Practical Systems Super