Falling interest rates are driving savers to look for other ways to get a better return on their money – but there is a warning that they should understand the risks they are taking.
The Reserve Bank of New Zealand is expected to cut the official cash rate today, which is good news for home loan borrowers but not so good for savers.
Households have $80.5 billion in savings accounts and $144b in term deposits. But from interest rate peaks, one-year term deposits have fallen from offering more than 6% to 3.5%.
Two-year rates have fallen from 5.75% to about 3.5%. Savings account rates have fallen from an average of more than 4.5% for conditional saving accounts including bonuses, according to the Reserve Bank, to less than 2%.
Unconditional savings account rates are now offering less than 1.5% on average – and much less in some cases.
Ana-Marie Lockyer, chief executive of Pie Funds, said her organisation was seeing increased interest from investors wondering what might give them a better return.
“With term-deposit rates falling in real terms, many investors are recognising that once inflation is taken into account, they’re effectively going backwards. That’s prompting some to look beyond traditional cash and term deposits in search of better long-term outcomes.
“At the same time, any move out of cash needs to be made carefully. Cash and conservative funds – or even other investments – each carry different levels of risk and are suited to different investment horizons.
“The key is ensuring investors are making decisions aligned with their goals, timeframes, and appetite for risk – not just reacting to the interest-rate environment. Our role is to help people navigate those choices so they can stay positioned for long-term financial wellbeing.”
MAS chief executive Jo McCauley said cash funds could be an option.
“Unlike term deposits, which lock money away and may penalise early withdrawals, a managed cash fund provides members with flexibility, potential for higher returns and low risk – making them an attractive alternative for savers.”
There had been a 35% increase in new cash fund investments over the past six months, she said.
Dean Anderson, founder of Kernel, said while term deposit balances were still near-record highs, the growth had clearly stabilised, and as people rolled off fixed rates they might wonder what to do.
“What you tend to find is term deposits, because they are locked up they tend to have a bit of a lag and then people tend to roll them into something else… what you see first is people pulling out of on-call savings accounts because they are more accessible and interest rates are falling.”
He said people who were reliant on interest income would need to look at other options.
“If you are looking at rates that are 3 percent and then you take out tax and inflation you’re probably not getting a return that is going to meet your income needs.”
However, there was no easy solution for investors, he said.
“We’ve got a housing market that’s flattened down, you’ve got a lot of media headlines that are talking about peaks in the share market and they’re probably thinking ‘Where do I put my money?’ which may be why there is still this lag in term deposits coming down or savings because people are in that paralysis state and don’t know what else to do.”
People might “bury their heads in the sand” through Christmas and then think about it in the new year, he said.
“I think the key callout here is, if they’re feeling concerned or it’s a bigger balance, financial advice is really key to help with this process.
“I think you’ve got to be cautious that they don’t just sort of jump on something as a FOMO (fear of missing out) because they’ve, you know, seen a great headline or past performance.”
Fisher Funds general manager of managed funds Robyn Conway was seeing a lot of people wanting to have conversations about managed funds and whether they were a suitable option.
“But term deposits as a comparison to managed funds are quite different in terms of how they operate”, she said.
“It is important that if someone is invested in a term deposit that they do speak to an adviser and ensure that a managed fund is right for them.
“Typically with a managed fund you’ll be investing for a certain period of time in order to reach the goals that you’re after from an investment perspective.
“And because they’re invested in share markets you do have to be aware of market volatility and there is a higher risk with managed funds as opposed to a term deposit which is more stable and people like that stability.
“If they are after certainty and a much shorter time frame for an investment, then a term deposit might be suitable but in saying that depending on what their goals are and what they are looking to achieve within a certain time period then a managed fund might be a good option to consider.”
