Savings hit puts retirees at risk

Retirees may be forced into increasingly riskier ventures to maintain decent returns.

Retirees with more than $170bn in term-deposit investments in their self-managed super funds face another bruising cut to savings rates, which investment experts say risks forcing retirees into increasingly riskier ventures to maintain decent returns.

As the Reserve Bank cut the cash rate to a record low of 0.75 per cent on Tuesday, self-managed super fund consultant Grant ­Abbott said ultra-low interest rates risked exposing retirees to a situation akin to the $400m collapse of the Westpoint property fund in 2005.

According to rate comparison site Mozo, the third RBA rate cut this year has put significant downward pressure on savings rates, with the average at-call rate falling from 3 per cent in 2011 to an average of 1.8 per cent. Term-deposit rates have been slashed to their lowest levels since the 1950s.

There are 1.2 million SMSF members with a collective $171bn in term-deposit investments, the second-largest asset class following $220bn worth of listed shares.

“I’m presuming most Australians want to be self-funded,” Mr Abbott said, “but it’s bloody hard in an environment of low interest rates; I can’t see any change over the next five to 10 years.”

Mr Abbott, a former chairman of the Australian SMSF Members Association, said retirees were often looking at high-yield funds backed with loans to property developers, which left savers vulnerable to a situation similar to the collapse of Westpoint in late 2005, which went into administration owing 4000 investors $388m.

The investment was a property-related scheme that issued unsecured promissory notes promising investors returns of up to 12 per cent a year.

“It can often be a current development, or bridging finance, but if you’re getting 6 or 7 per cent, it means the fund has to charge someone at least 9 per cent for the finance,” Mr Abbott said. “If you take a closer look at it, it’s usually a pretty risky underlying investment and when the credit dries up, if there is a liquidity crunch, that’s when it all hits the fan.”

Andrew Moore, chief executive of tech-focused superannuation fund Spaceship, said almost two million millennials who didn’t own property were now the new “forgotten Australians”.

“They are typically savers rather than borrowers, and interest rate cuts lower the returns they receive on their bank savings,” he said. “Lower interest rates favour borrowers but hit savers hard. Savers might want to consider adding higher-risk, higher-return investment products to the mix in this low interest rate environment.”

As the RBA rate cuts shunt retirees into riskier investments, economists have raised doubts that reductions to the cash rate will filter through to increased borrowing, even though many commercial mortgage rates are under 3 per cent for the first time.

“Business and housing investment is less responsive to a drop in interest rates when the cash rate is already below 2 per cent than when the cash rate is at more normal levels,” KPMG chief economist Brendan Rynne said. “The likelihood is that even these reduced stimulatory effects will dissipate further as the cash rate approaches the lower bound of 0 per cent.”

Analysts at Macquarie Wealth Management said tougher debt-to-income limits on home loans would constrain borrowing cap­acity if rates continued to fall because house prices were rebounding while wages growth had stalled.

This would limit potential upside to a rebound in credit growth.

Official figures released on Tuesday showed approvals for new housing construction dropped to their weakest level since 2013. In August, total dwelling approvals declined by 1.1 per cent, adding to an annual decline of 21.5 per cent over the past year.