Have Term Deposits Done Their Dash?

Have term deposits done their dash? For decades they have been the default home for cautious New Zealand savers, particularly retirees and anyone who wanted certainty of capital without having to think too hard about where else the money could go. The Reserve Bank has cut the Official Cash Rate nine times since August 2024, top 12-month rates now sit below 4%, and inflation is back at the top of the target band. The familiar product has quietly become a less reliable tool. The question is whether familiarity is still a good enough reason to keep choosing it.

The short answer

Term deposits still have a clear role for short-term capital preservation, contingency reserves, and money with a defined purpose inside the next couple of years. For capital with a longer horizon, the current rate environment has made them corrosive rather than conservative.

On a $100,000 twelve-month deposit at 4.0%, a saver in the 33% tax bracket ends the year with about $99,593 of real purchasing power after inflation of 3.1%. In the 39% bracket, real purchasing power falls to around $99,360. The numbers are small on a one-year view. Over ten or twenty years of rolling deposits, the compounding cost is material. The full arithmetic and the assumptions behind it are set out in our piece on the negative real rate of return on term deposits.

The useful question is whether each parcel of your money has a short-term job or a long-term one, and whether the tool matches the job.

Why the environment has shifted

Three changes over the past eighteen months explain why a product that worked well for many savers through 2023 no longer does the same work today.

1. Interest rates have fallen sharply. The OCR has moved from 5.50% in mid-2024 to 2.25% as of early 2026. Top one-year term deposit rates that touched 6% two years ago now sit closer to 3.7 to 4.0%. A saver rolling a maturing deposit in 2026 typically faces a materially lower rate than the one they originally locked in.
2. Inflation has proved stickier than forecasters expected. The December 2025 quarter CPI came in at 3.1%, at the top of the Reserve Bank's 1 to 3% target band. Non-tradables inflation, driven by items such as electricity, council rates, insurance, and rents, has been higher still for households whose spending leans toward essentials.
3. The tax treatment of bank interest has not changed, and remains one of the least efficient ways to earn an investment return in New Zealand. Interest is taxed at the investor's full marginal rate via Resident Withholding Tax, which rises to 39% on income above $180,000. The result is a squeeze from both sides: lower headline rates combined with a tax regime designed for a higher-yielding era.

Cash, term deposits, and the two jobs of money

Most households hold money for two quite different reasons. Mixing the two is where the trouble begins.

Money with a short-term job is for spending, emergencies, or a near-term goal. A house deposit due in eight months. A renovation starting next winter. A tax bill arriving in April. Three to six months of living expenses held in reserve. For this money, certainty of capital is worth more than real return. A term deposit, a high-interest savings account, or a PIE cash fund all do the job. The priority is that the dollars will be there when you need them.

Money with a long-term job is for growing wealth, funding retirement, or building financial freedom over decades. For this money, the priority is the opposite. Short-term certainty matters less. What matters is whether the after-tax, after-inflation return is high enough to carry you toward the goal. Over a long enough horizon, a term deposit at a negative real return compounds against you just as surely as a diversified portfolio compounds for you.

The distinction is discussed in more depth in our companion pieces on when holding cash costs you money and why saving alone no longer builds wealth.

The trade-off most savers never quantify

Locking $100,000 into a term deposit for a year feels like doing something responsible. The bank statement goes up. Nothing is lost in nominal terms. What does not appear on the statement is the cost of not doing something else with the money.

A diversified portfolio carries genuine short-term risk. Some years will be negative. The 2022 calendar year saw one of the worst periods for bonds in modern history, and share markets fell alongside them. What the long-run record shows is that a mix of shares, bonds, and property has historically delivered real returns well above inflation over periods of ten years or more, even after tax and fees. Zero years are guaranteed. But over a full investing life, the compounding difference between a slightly negative real return on cash and a positive real return on a diversified portfolio is what separates treading water from getting somewhere.

The behavioural pull toward term deposits is understandable. Certainty feels safe. Watching a portfolio fall 15% in a quarter does not. The question worth sitting with is which risk matters more over the life of the money. For capital needed in twelve months, market volatility is a real threat. For capital needed in twenty years, the slow, compounding certainty of losing purchasing power is the larger one.

When term deposits still make sense

A thoughtful use of term deposits looks quite different from a default one. They remain well suited to three specific situations.

1. ‍Money with a known spending date inside one to two years. A house deposit, a planned renovation, a known tax obligation. Certainty of capital outweighs the low real return. Locking in a fixed rate for the window between now and the spend protects you from both market volatility and the awkwardness of selling something at a bad moment.‍
2. Emergency reserves. Three to six months of living expenses, held somewhere liquid and predictable. Laddered short-term deposits can suit this purpose, though a high-interest savings account or a PIE cash fund often does the same job with better tax treatment and full accessibility.‍
3. A deliberate cash allocation within a diversified portfolio. Investors close to or in retirement often hold a portion of their portfolio in cash or near-cash, both to dampen volatility and to cover drawdowns without having to sell growth assets during a market downturn. The key word is portion. When term deposits become the portfolio rather than a component of it, the long-term real return problem takes over.

The alternatives, briefly

The conversation around term deposits is easier once you see the full shelf of options. Each has its own place, and each suits different time horizons and levels of comfort with fluctuation.

Bonds occupy a similar conservative slot to term deposits but often deliver better after-tax outcomes, particularly when held through a PIE-structured fund. They also offer a tradeable market price, which matters when rates are falling. Our piece on term deposits versus bonds works through the mechanics in detail.

PIE-structured cash funds are a frequently overlooked halfway house. They invest in short-term deposits and similar instruments, deliver returns broadly comparable to term deposits, and are taxed at a maximum of 28% rather than the investor's full marginal rate. Daily liquidity is usually included, so there is no break penalty for accessing the money.

Diversified managed funds and KiwiSaver Schemes provide access to a mix of shares, bonds, property, and cash across the full risk spectrum. Most are PIE-structured, capping tax at 28%. For the portion of wealth with a long-term job, this is generally where the work gets done.

Direct shares and property suit some investors with the scale, time, and temperament for them. Both carry higher volatility and, in the case of property, concentration and liquidity risks that do not apply to diversified funds.

Have term deposits done their dash?

Not entirely. They remain a perfectly reasonable home for money with a short-term purpose, and the Depositor Compensation Scheme introduced in July 2025 has made their nominal safety stronger than at any point in recent history. The scheme now covers up to $100,000 per depositor per licensed deposit taker.

Where term deposits have lost their edge is as a default home for wealth of any meaningful size held over any meaningful horizon. Lower headline rates, persistent inflation, and a tax regime that treats every dollar of interest as taxable have combined to push real returns into negative territory for most savers. The product has not changed. The environment around it has.

For most households, the useful exercise is to separate the cash holdings with a defined short-term purpose from the cash holdings without one. The first group, term deposits are still a fair choice. The second group, worth a longer conversation.

"The clients who get the most value from this conversation are usually the ones who have rolled the same deposit three or four times without revisiting what the money is for. The product was the right answer for one set of conditions. Rolling it blindly into a different set is where the cost builds up." Marcus Mannering, financial adviser, Become Wealth.

If you hold a meaningful balance in rolling term deposits and have not recently considered whether the structure still fits your circumstances, the team at Become Wealth is happy to work through it with you. Book a complimentary initial consultation to discuss how your current savings and investments are positioned.