When you want a safe part in your savings, there are more options than an on-call savings account. Term deposits and bond funds give exposure to fixed income with different levels of access and risk. This is not the place for high hopes about return, but for stability and for balancing the growth part of a portfolio. We compare the options on four points: risk, expected return, how quickly you can reach the money, and how it is taxed.
An on-call savings account with the Depositor Compensation Scheme is the simplest option: variable rate, no fixed term, money reachable immediately and protected up to $100,000 per depositor, per institution. The interest is taxable income, with RWT deducted at your rate.
Bonus-saver accounts pay a higher rate if you meet monthly conditions. The downside of any savings account is that the rate can be cut at any time, and it rarely beats inflation by much. For your emergency fund and money you will use soon it is still usually the right choice.
A term deposit locks a fixed amount away for a fixed period — from one month to five years — at a rate agreed up front. Longer terms usually pay more. Because the rate is fixed you have certainty, but you cannot get the money out early without giving notice and losing part of the interest.
A common tactic is a term deposit ladder: split your money across several deposits maturing at different times, so some comes free every few months to reinvest at the current rate. Term deposits are covered by the Depositor Compensation Scheme the same as other deposits.
A bond fund owns many fixed-income securities — New Zealand government bonds, local council and corporate bonds, sometimes overseas bonds. Short-duration bond funds move very little and sit close to a term deposit in risk; longer-duration funds can fall in value when interest rates rise, but normally offer a higher expected return.
Bond funds are usually held as PIEs, so tax is handled at your PIR. For the safe part of a portfolio, many New Zealanders simply use term deposits and savings accounts, which are simpler and government-guaranteed up to the limit.
Informational content, not financial, tax or legal advice. Check amounts, limits and current rules directly with the official sources (Work and Income, the Reserve Bank of New Zealand, Inland Revenue, the Depositor Compensation Scheme) before making a decision.
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