The Commonwealth Government says it will extend its bank deposit guarantee that was put in place to protect consumers during the height of the global financial crisis, although with a much lower protection cap.

The deposit guarantee of $1 million, which was set to expire next month, was put in place to ensure that consumers with money deposited with Authorised Deposit Taking Institutions (ADIs) – such as banks, building societies and credit unions – would not be left out of pocket if their financial institution were to collapse.

Known as the ‘Financial Claims Scheme’ and administered by the Australian Prudential Regulation Authority (APRA), the guarantee will not expire completely, but be lowered to $250,000 effective 1 February, 2012.

The guarantee is ‘per person, per institution’, so SMSFs that have more than $250,000 in term deposits or cash accounts can potentially spread their money around different ADIs to ensure that all their deposits are government guaranteed. Nice to know!

The new $250,000 cap is higher than anticipated, as Treasury had previously singled a cap in the range of $100,000 to $250,000. The extension of the existing cap to 1 February and some of the new transitional provisions are also generous.

The transitional provisions work like this: term deposits that exceed $250,000 and were opened prior to the day of the announcement – 11 September 2011 – will continue to be guaranteed up to the existing cap of $1,000,000 until 31 December 2012, or until the deposit matures, whichever occurs sooner. If the term deposit matures before 1 February 2012 and is rolled over, the new cap of $250,000 will apply from 1 February 2012. If the deposit matures after 1 February and before 31 December 2012 and is rolled over, the new cap will apply from the rollover date.

Although the new cap doesn’t take effect until 1 February, the transitional provisions only apply to term deposits taken out before the date of the announcement. For example, if your SMSF invested in a $400,000 six month term deposit today and it was set to mature in March 2012, the deposit would be guaranteed for $400,000 until 1 February, and then only $250,000 from 1 February.

Term deposit rates have already fallen, and I think they are set to fall further. Back in July in my column Term deposit rates set to drop, I outlined a number of reasons why term deposit rates were unsustainable, and I would now add to that a more-than-likely cut to the Reserve Bank of Australia’s cash rate – probably at their ‘Melbourne Cup’ meeting in November.

So, what rates are available now and where should you invest?

As the table below shows, the term deposit ‘yield curve’ is very flat and there is little differentiation in rates offered between the major banks and the so-called ‘second tier’ ADIs. Depending on how you are positioned with the guarantee (remember, it’s per institution), St George’s offer of 6.05% for five years looks pretty attractive.

If this is too long a duration for your SMSF, it’s hard to go past Arab Bank’s 6.10% for a 12-month term, and if you’re worried about risk, remember up to $250,000 per depositor is guaranteed by the Commonwealth Government!

Note: Rates current as at 16 September, 2011 for term deposits of > $10,000, with interest on 3- and 6-month TDs paid on maturity, interest paid annually on 1yr, 2 yr and 5 yr TDs.

¹ ANZ, NAB rate is for 5 months.

² Westpac, St George rates are for 5 to < 6 months.

³ Westpac, St George rates are for 48 to < 60 months.

Important information: 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Also in today’s Switzer Super Report

• Roger Montgomery: Are Myer and David Jones dead in the water?
• Peter Switzer: Is the vacation almost over for Europe?
• Tony Negline: New opportunities open for investing in property