Written

For

The

Australian

-

If

rates

have

peaked

it’s

time

to

look

at

fixed-term

deposits

and

annuities

Are you one of the "lucky ones" watching interest hit your bank account each month? Enjoy it while it lasts — because the party may be winding down.

With inflation dipping below 5 per cent and heading back towards the RBA's 2 to 3 per cent target, the consensus is building that 2024 will be the year we start coming down the other side of the rate mountain. For mortgage holders, that's a relief. For cash-heavy investors, it's a warning shot.

Just as savvy borrowers scrambled to lock in sub-2 per cent fixed mortgages during the Covid lows, cashed-up investors should be asking the mirror-image question right now: is it time to lock in these attractive rates for the next five years?

The big four are offering five-year term deposits at around 4 per cent. Challenger is offering a five-year term annuity at 5.05 per cent. The catch? Annuities don't sit under the $250,000 federal government deposit guarantee, so that extra return isn't free.

Annuities deserve a closer look for retirees though — and not just for the yield. A $100,000 Challenger lifetime annuity for a 65-year-old male paid $3,950 in year one back in December 2020 (a 1.49 per cent IRR). Today, the same product pays $5,134 — an IRR of 3.74 per cent. Many products also offer up to 100 per cent return of capital on premature death, so the fine print matters.

The often-overlooked kicker is Centrelink. Lifetime annuities enjoy a 40 per cent discount under the assets and income tests. For someone hovering just above the pension threshold, an annuity can unlock a part-pension — and with it the Commonwealth Seniors Health Card, worth thousands a year.

Rates below inflation over five years won't suit everyone. But if we really are at the peak, doing nothing has its own cost.