With the benchmark interest rate now close to a record low of just 3.25%, will the Reserve Bank of Australia (RBA) cut it again before Christmas? The market seems to think the Bank will, with the December 90-day Bank Bill futures contract trading just a few basis points over 3%. The market is also pricing in a second cut early in the first quarter of next year, which would take the cash rate down to 2.75%.

While the RBA has made a ‘Melbourne Cup Day’ move a regular event over the past few years, I’m in the camp that says they will wait a little bit longer before cutting, probably until February, because they appear to be concerned about the risk of an acceleration in housing prices. Time will tell. The real trick will be to work out when the easing cycle has come to the end. There is no sign of this yet, so the issue for many self-managed super fund (SMSF) trustees is how to make their cash work harder in the short term. Let’s go shopping.

Term deposits

If you can get through the hassle of the account opening process (ING Direct is probably the standout with the easiest process), then the interest rate is really the only consideration when it comes to term deposits.

One proviso – ask the bank about the notice they provide when your term deposit is set to mature and how easy it is to advise them of your new instructions. Some term deposits are set to automatically rollover into a new deposit of the same term at the standard rate (rather than the ‘headline’ or ‘blackboard special’ rate) and the new rollover rate can come as a nasty shock to investors who forget to advise their bank not to do this.

Some innovations are occurring in the term deposit market, with both ING Direct and UBank rewarding investor loyalty by paying an additional 0.10% per annum when an investor rolls over the full amount of a term deposit into a new deposit term.

Latest term deposit rates

Rates as at 15 Oct 2012, for deposits of $50,000 and upwards. Interest paid on maturity, or annually for 5 year term. 

UBank’s 5.05% for six months is probably the standout offer. If you are looking something long term (five years), the Westpac Group (Westpac, St George and Bank of Melbourne) options are clearly designed to grab investor attention! They are priced at around 200 basis points over the swap rate, compared with around 130 basis points on shorter term deposits.

Bank accounts

I’m somewhat aghast at the number of questions I get along the lines of “is this bank safe”. Well, maybe not if you don’t believe in Government guarantees – for me it’s largely an irrelevant question. Known as the ‘Financial Claims Scheme’ and administered by APRA, the Government guarantees deposits (including term deposits) of up to $250,000 on a ’per account holder, per financial institution’ basis. That is, your fund can have $250,000 in total with Bank A, another $250,000 with Bank B, another $250,000 with Bank C, etcetera – and all deposits will be covered by the guarantee. A financial institution includes the likes of banks, credit unions and building societies.

So, the question is, how many accounts do you want, and is it worth the effort to change or open a new account?

Here are the rates and features for those banks offering tailored SMSF cash accounts:

If interest rate is the key determinant, then UBank and RaboDirect are the clear leaders. UBank, with its bonus rate of 5.36% paid in any month when there is no withdrawal, edges out RaboDirect. Of the majors, Westpac with its integrated two-account structure of a ‘working account’ and ‘savings account’ (the latter paying 3.45% on the whole balance) is better than the Commonwealth Bank offering.

Note that unfortunately, if your SMSF has more than two trustees or two directors, you can’t open an account with UBank!

If transactional ability is important to you, then it’s hard to go past the major banks. The online banks (and some regionals) require a ‘linked bank account’ for making payments/transfers out, and don’t offer BPay. This can be somewhat self-defeating for an SMSF as you will then need to maintain a second account with a bank that provides transactional capabilities, potentially incurring a monthly fee of up to $10 per month.

UBank has attempted to address this and a linked account is not mandatory. It offers a ‘pay anyone’ facility, but this is capped at $20,000 per day and payments in excess must be done via a linked account.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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