Barbara Drury July 11, 2012
Stashed for winter … RSAs offer a good alternative to super for those close to retirement. Illustration: Karl Hilzinger
Retirement savings accounts keep things refreshingly simple and transparent.
Imagine a superannuation fund that was simple and transparent, with no fees and was guaranteed not to lose money. ''Pigs might fly'' would be most people's response.
But such funds do exist.
Retirement savings accounts, or RSAs, are a special type of bank account designed for super savings and pensions. They have been around for more than a decade, and have been given a new lease of life since the global financial crisis.
''Since the GFC, a lot of people are looking at their super and questioning whether [these accounts are] a good idea. People don't like market risk,'' says the general manager of strategy at Heritage Bank, Peter Cavanagh.
RSA providers have been quick to step into the breach with product innovations including term deposits, pension options and insurance.
Last week, Heritage launched an online-only RSA, the Secure Super Account, in response to investors' current preference for the certainty of cash.
''RSAs seem like a product of the times. They are low-cost, simple to understand, with a known rate of return and no complicated trustee structure,'' Cavanagh says.
RSAs were first introduced in 1997 but in the boom market that followed, investors preferred to chase high returns in market-linked super funds.
And the big financial institutions have been reluctant to promote them because they don't generate income from fees.
Only one bank, the Commonwealth, offers an RSA; the other eight providers are credit unions or mutuals.
The RSAs operate under the same rules as super funds in terms of who can open them, contribution limits and taxation.
They can accept employer superannuation-guarantee payments, voluntary contributions, rollovers, eligible spouse contributions and
Not only are RSAs capital guaranteed so you can't lose money, but unlike other super funds they are protected by the Australian government's guarantee for bank deposits up to $250,000. RSAs also have ''small account protection'' which means that balances under $1000 are not eroded by fees or charges.
FIXED AND VARIABLE
The Defence Bank launched its public-offer RSA two years ago. According to its chief executive, Jon Linehan, the product has been so successful it already represents about 20 per cent of the group's deposit book.
''We put a highly competitive product in the RSA space because we thought those RSAs that did exist could have paid more [interest],'' Linehan says (see story below).
As well as fixed and variable rates of interest, the Defence Bank Super Assured RSA was the first to offer a pension product that enables customers to draw down tax-free income on retirement, and it is one of only a few to offer life insurance.
Most RSAs charge no entry, management or administration fees but some charge a termination fee for closing the account, which is typically about $40.
The Commonwealth also charges a $35 annual administration fee. However, people should always check what fees apply and how they work.
An RSA doesn't suit everyone. If you are young and can afford to ride out market volatility, then growth assets such as shares and property will produce better returns than cash in the long run.
But RSAs can be a good solution for those near retirement with cash to invest.
''We get people who have sold investment properties and they put that money in a super account. You can put in up to $450,000 [as an after-tax contribution] every three years,'' Linehan says.
While most super funds have a cash option, a financial planner at Key Solutions Group, Jeremy Rankin, says RSAs are a good alternative for someone nearing retirement who doesn't already have a super fund and doesn't want the complexity of starting one.
They are also useful for people on Centrelink benefits with cash to invest, because super is not counted as an asset for Centrelink purposes.
''The idea that you can go into your local bank branch and open an account is a nice way for people to feel comfortable with a short-term super account.
''You can put contributions in and, from a cost perspective, you don't need a financial adviser,'' Rankin says.
How they rate
While retirement savings accounts offer cash investments with regular interest payments, they all set their rates in slightly different ways. Most offer tiered variable rates depending on the amount invested; some offer fixed rates similar to term deposits; and some offer both.
For example, the Commonwealth Bank offers variable rates of 2.5 per cent on amounts up to $10,000, rising to 3.05 per cent for more than $50,000. The fixed-term option pays 2.8 per cent for up to two years and up to 3.3 per cent for 5 years.
Daniel McDougall from the Australian mutuals peak body, Abacus, says the mutuals' average RSA rates range from 3.08 per cent for amounts up to $10,000 to 3.68 per cent for amounts up to $50,000.
Defence Bank was the first to use a term-deposit structure and has found most of its members prefer fixed rates.
"Our RSA allows people to access term-deposit rates without having to start a self-managed super fund," the head of Defence Bank, Jon Linehan, says.
Heritage Bank links returns to the official cash rate. Its new Secure Super Account pays an interest rate equal to the Reserve Bank's official cash rate plus 0.5 per cent, which means it now pays 4 per cent.
"The Reserve Bank sets rates to tackle inflation so rates go up when inflation is high and most retirees try to beat inflation," a general manager of Heritage, Peter Cavanagh, says.
Heritage back-tested its fund over the five years to last December and found that its new RSA would have outperformed not just inflation but the best-performing Australian super fund over that period.