How retirees can keep the good cash times rolling

It is a great time for retirees holding cash investments. Some high interest bank accounts are paying more than 5 per cent interest while private credit investment funds are paying up to 10per cent interest. We have to go back to 2008 to find a period when cash was paying so well. But just like the 1970 George Harrison song All Things Must Pass, there will be a time when we have to say goodbye to these healthy interest rates, and that time may just be around the corner.

Although Reserve Bank governor Michele Bullock is not in a rush to reduce the official cash rate from the current 4.35 per cent setting, futures markets have even money odds that we
will see a rate cut by Christmas. And beyond that, the consensus from economists is that we will see multiple rate cuts into 2025 as inflation falls back within the 2 to 3 per cent RBA
target band.

Sharemarkets are predicting four interest rate drops over the next 12 months and big banks are in agreement, recently cutting interest rates on their fixed rate mortgages. For deposit
holders, bank term deposit rates are hovering around 4 per cent for 12 months and 3.5 per cent for 60 months.

If inflation falls to 2.5 per cent by 2026 as the RBA forecasts, the problem with a 3.5 per cent yielding term deposit is that the real rate of return is only 1 per cent. And if tax is paid on the interest, the net return after inflation and tax could end up being negative.

Looking at some of the options to try to maintain higher cash returns, fund manager Pengana recently released a product named TermPlus. Investors can choose to lock their money for one, two or five-year periods with different interest rates offered.

Currently the one-year account pays 7.35 per cent interest (RBA cash rate plus 3 per cent), 8 per cent for two years (RBA plus 3.65 per cent) and 8.5 per cent for five years (RBA plus 4.15 per cent). Pengana makes it clear, though, it is not a bank and it is not offering a term deposit.

The interest rate is variable meaning that as the RBA cash rate drops, so will the interest on the TermPlus account. In other words, it is not the interest rate that is fixed for the term, it is the money invested in the account that is locked away for the term. TermPlus is not covered by the federal government’s $250,000 guarantee on deposits and investors can expect up to one year of negative returns over a 20-year period.

When you invest in the TermPlus account, your money gets invested in the Pengana private credit feeder fund, which then gets invested in the Pengana private credit master fund, both domiciled in the Cayman Islands. With the assistance of Mercer, this fund invests in a wide variety of global private credit investments including more than 2000 individual loans comprising both senior debt and mezzanine finance investments.

Pengana Capital Group chief executive Russel Pillemer says: “TermPlus unlocks the world of global private credit to deliver highly attractive target rates for all Aussies.

“TermPlus is a long-overdue offering for Australian savers looking for great target rates from their online term accounts.”

And if things go wrong, there are three layers of protection that can kick in to reduce the chance of the investor exiting after the term with less than what they started with, although understanding the exact mechanics of how this works in practice may be a little difficult for the average retiree to get their head around.

Originally published in The Australian here. 

By James Gerrard