Super a safer bet than online bond blarney

There is no question that interest rates are on the way up. But the most realistic estimates are a maximum rise of 1.5 per cent over the next two years, which does little to assist retirees who are unwilling or unable to take advantage of the returns offered by superannuation.

Even with interest rates rising, returns from cash and term deposits will probably remain well below historical levels for several years.

The obvious solution for retirees is to seek expert advice to improve their situation. However, the sad reality is that the federal government has effectively neutered the financial advisory system with a range of well-meaning but totally ineffective compliance measures.

The high cost of advice has led to many retirees doing their own research on the internet. While this may be useful in certain specific cases it also leaves them open to bad decisions and – even worse – to becoming the victims of scams.

Just last week I received an email from a bloke telling me that he had sold a property and been searching the web to find ways to invest the money.

He was attracted by an investment in commonwealth bonds, maturing next year, offering 5.5 per cent, and was emailing me for my opinion.

My response was: “That sounds too good to be true, but tell me more – if that’s available I wouldn’t mind some for myself.”

He sent me the email he had received from a company he had found on the internet that gave details of the alleged investment.

I checked with a friend, who really knows his bonds. He pointed out that the two bonds in question were old commonwealth bonds that were nearing the end of their life, hence maturing next year.

Their respective rates were 5.5 per cent and 4.75 per cent, reflecting the high interest states that were current when they were issued.

But even though the maturity value of a bond is fixed, the daily value varies in line with prevailing interest rates.

My enquirer would need to pay $108 for a $100 bond paying 5.5 per cent and redeemable next year.

The other bond had a coupon rate of 4.75 per cent and was redeemable in 2027. The current price of that was $116 for the $100 bond.

By “investing” in these bonds he would receive the full coupon amounts of $100 on maturity but would be faced with a capital loss of between 8 per cent and 16 per cent because of the premium he would have paid to buy these products. There is no such thing as a free lunch: the market had priced them to yield 1 per cent for the 2023 bond, and around 1.5 per cent for the 2027 bond.

I pointed out to him that his “safe” investment in government bonds would give him a guaranteed capital loss, and an overall return no better than he was getting at the bank. Given his age and investment goals, superannuation would be a much more effective investment for him, with all the decisions made by experts and not by somebody inexperienced researching the web to see what they could find.

NOEL WHITTAKER IS THE AUTHOR OF RETIREMENT MADE SIMPLE

AND NUMEROUS OTHER BOOKS ON PERSONAL FINANCE. HIS ADVICE IS GENERAL IN NATURE AND

READERS SHOULD SEEK THEIR OWN PROFESSIONAL ADVICE BEFORE MAKING ANY FINANCIAL DECISIONS. EMAIL: noel@noelwhittaker.com.au