This week’s decision by the Reserve Bank of Australia (RBA) to hold its cash rate at 1.5 per cent has again underscored the reality that most savings accounts today are not paying enough interest to grow your wealth.
But there are a handful of deeming accounts that still pay 3.25 per cent interest on large deposits. Comparison site Canstar lists them, including details of conditions you have to meet to earn what is known as the deeming rate. This rate is what the Government assumes you are earning in interest on your savings in order for it to calculate Centrelink entitlements.
To be called a deeming account, Canstar says the financial institutions offering them are legally bound to pay interest at the legislated deeming rate. This rate is actually two different components. The first component of 1.75 per cent applies to:
- The first $50,200 of a single customer’s total financial investments, or
- The first $83,400 of a pensioner couple’s total financial investments, or
- $41,700 of total financial investments for each member of an allowee couple.
A deeming rate of 3.25 per cent applies to savings above these amounts.
Canstar Group Executive Financial Services Steve Mickenbecker told YourLifeChoices there are six deeming accounts being offered by small providers.
“Let’s say you have $200,000. In a deeming account, you would get an average 3.1 per cent, once you take into account the different rates for the first and second portion of the balance,” Mr Mickenbecker said.
“In some ways, if you have a largish nest egg, these accounts can be more convenient than savings in a term deposit because you don’t have to wait to make a withdrawal if you need to access your cash immediately,” he said.
Most other savings accounts marketed at retirees do not pay the equivalent of the Federal Government’s deeming rates, shelling out less than 2 per cent.
Mr Mickenbecker said that retirees who do not have a large deposit and are not likely to be making withdrawals every month should shop around for better interest rates.
Canstar lists a number of ‘regular saver’ accounts that pay above 2.8 per cent ‘bonus’ interest. However, the bonus rates do come with conditions, Mr Mickenbecker said.
Those conditions can include not making withdrawals, not linking accounts, and providing no access to online banking, branches or ATMs.
When considering switching savings accounts, it’s wise to look beyond the advertised interest rates. Ask the bank to send you full details of how the account operates, what its limits are, whether it charges monthly, and to list the transaction fees or other costs that could chip away at your nest egg.
What type of savings account works best for you? When was the last time your bank increased interest rate on your savings? Do you remember the highest interest rate you ever received for a savings account?