Cutting through confusion and complexity
Assumptions are a gateway to a mistake, so the saying goes. Despite this, many of us are still prone to making assumptions or veering into denial about financial decisions when it all feels too hard or too complicated.
This seems to be the case with cash account holders. It would appear, according to a recent Inquiry, that many of us are getting a bad deal, but doing little about it.
The Inquiry, conducted by the Australian Competition and Consumer Commission (ACCC), has resulted in the publication of a report entitled the Retail Deposits Inquiry Final Report. It’s worth a quick read and it’s also in audio book format. The following is a brief summary of what this report reveals.
So why aren’t more people benefitting?:
- Deposit products can sometimes be quite complex and many people don’t take them up as a result. There are ongoing barriers to consumer engagement with these products due to confusion and complexity.
- When the Reserve Banks raise interest rates the banks take a long time to pass the benefits on to depositors, and then often not the full amount. They are not as slow in passing them on to borrowers.
- Banks engage in ‘strategic’ pricing which means different customers may be offered different rates or terms and conditions. Like many companies they often give better deals to new customers than existing loyal customers.
- Comparison websites may rank different accounts according to commercial considerations, not just interest rates.
The ACCC also made the following recommendations:
- Bank account ‘portability’ would strengthen consumer rights
- Clear comparisons are needed, both by banks and by comparison sites
- Banks need to advise customers if they are in danger of lower interest rates or penalties due to confusion or unclear information.
Whilst is would be comforting to think such changes will occur anytime soon, that is unlikely. In the meantime, it appears that the Australian retail bank consumer will continue to have a tough time ensuring that they are receiving the best possible return on cash invested in retail deposit accounts.
But the bigger question is …
Is cash even the right vehicle for the bulk of your savings?
The answer might well be no! Or it could be yes, but only up to a certain amount. How do you grapple with this very common dilemma if you are comfortable with cash deposits and feel a strong sense of security having a good proportion of your savings in cash?
In another article this week, we reported on the returns on cash investment compared with those in balanced or growth super funds over the past 10 years (until 31 December, 2023).
Here’s a link to the chart showing these comparative returns.
This shows an investment of $100,000 in a median balanced option fund over ten years now being worth $189,005. If invested in a median growth option fund it would be worth $201,539. The same amount invested in cash would be worth $117,637.
Now this doesn’t mean that holding a cash component in your retirement funding mix is unwise. Some reasons to hold an appropriate amount of cash include:
- Liquidity and accessibility – cash can be withdrawn in minutes. Super is also accessible, but may take a day or two to actually receive.
- Unit size – you can withdraw any amount you like down to a 5-cent coin. Property is more difficult to ‘divide’ and some stock market funds have high unit prices.
- Peace of mind – holding cash might simply make you feel more secure.
Choosing an appropriate investment level for cash
There is no right answer here, nor should there be. It’s a highly individual matter. It doesn’t need to be all or nothing. If you had wanted the flexibility of cash for that rainy day scenario you could always put $20,000 into a cash deposit and still enjoy the benefits of a balanced investment for the remainder of the money. Your own personal approach to investing and tolerance of investment risk is important. Over the long term balanced funds will be likely to outperform cash and generate a higher income in retirement. But there are also ups and downs. Our advisers can take you through a risk tolerance consultation if you would like to better understand the approach to investing that might best suit you.
This article is provided by Retirement Essentials Representative Number: 001260855. We are an authorised representative of SuperEd Pty Ltd ABN 88 118 480 907 AFSL #468859. This information is not intended as financial product advice, legal advice or taxation advice. It does not take into account your personal situation, goals or needs and you should assess your own financial situation, consider if the information is suitable for you and ensure you read the relevant Product Disclosure Statement (PDS) if you choose to make any changes to your financial situation. It is always advisable to consult a financial adviser before making financial decisions.