A Penny Saved is a Penny Earned

Q. I have made a New Year’s resolution to get on top of my spending and start saving into KiwiSaver.  I earn $45K per annum which is quite a good salary but I have racked up some big credit card bills.  Should I pay them off before I sign up to KiwiSaver?

A. That’s a good New Year’s resolution and I wish you luck with it.  Overspending is a habit and like any habit it takes a lot of effort to make effective and permanent change. 

You will be paying a high rate of interest on your credit cards.  It may be worth talking to your bank about consolidating them into one loan if you can negotiate a lower interest rate.  Cut up your credit cards and only spend money that you have.  Sell off all your possessions that you no longer use or need - through TradeMe and garage sales - and apply all the proceeds to your debts.  This takes a bit of time and effort but it may discourage you from further unnecessary spending – especially when you see how much less you get than what you paid for them. 

Develop a frugal mindset by recycling, buying at op shops and getting tips from websites such as www.oilyrag.co.nz.  This website is a mine of information listed alphabetically from Auctions to Weddings and with everything in between including such topics as Pets, Health, Transport and Fitness.

Should you sign up to KiwiSaver?  Usually repaying debt takes precedence over saving, but the attractive government top ups put KiwiSaver in a league of its own.  If you join now and contribute 2% of your salary, you will be saving $900 per year.  This is nearly enough to earn the maximum government top up of $521 per annum.  Once you have paid off your credit cards you can think about increasing your contributions to 4% of your salary, or you can top up your fund by $142 to get the full tax credit.  If you join now you will get a pro rata tax credit in July 2011 for the 6 months that you have been a member, but from July 2013 you should get the full tax credit.  Of course you will also get the $1000 ‘kickstart’ when you join, and your employer will contribute 2% as well. 

With the combination of kickstart, tax credits, employer contributions and your own savings you will have around $3000 in your KiwiSaver account in 12 months’ time.  This should make you feel more in control of your finances and help you maintain your new more frugal lifestyle. 

As published in the Hawkes Bay Today 27 December 2011

Shelley Hanna is an Authorised Financial Adviser FSP12241.  Her disclosure statement is available on request and free of charge by calling 8703838.  The information contained in this article is of a general nature and is not intended to provide specific or personalised advice.  If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz.

Which KiwiSaver is right for me?

QUESTION:     I have always believed that, as a moderately risk-averse investor, it is best to invest in a “balanced” investment as such funds tend to perform well in the long term, so when I joined KiwiSaver at its inception I opted for a balanced portfolio.  My KiwiSaver provider - Gareth Morgan KiwiSaver (GMK) -provides detailed performance analyses and I note that conservative funds have fared much better than balanced funds.  As I am 62, there’s not all that long now for my balanced fund to start performing better, would it be better to transfer to the conservative fund?

ANSWER:         You say ‘in the long term’ and you are right, you can expect a balanced fund with more growth assets to perform better than a conservative fund over the long term.  But how do we define ‘long term’?  The benchmark used to be 5 years, but lately we have been seeing ‘10 years or more’ from some managers.  Let’s look at the fund you are in.

When you joined KiwiSaver you were 58 and still had 7 years to go to age 65.  According to the GMK website, their Balanced KiwiSaver “suits savers with 3 to 10 years to retirement. The portfolio holds no more than 70% in yield and growth shares, with the balance in cash, deposits, and fixed interest investments.”

With only 3 years to go, this is a good time to review your goals.  Do you plan to cash up your KiwiSaver when you turn 65 - or continue with it?  Fund managers expect many investors will continue with their schemes (no longer locked in) beyond age 65, withdrawing funds to meet their retirement needs.  So your timeframe may be longer than 3 years.

Did you complete a thorough risk assessment before you chose the Balanced fund?  You describe yourself as ‘moderately risk averse’ and yet you are in a fund which can hold up to 70% in shares. 

I have a problem with the terms commonly used to describe diversified portfolios:  conservative/ balanced/ aggressive.  It sounds more like a mental health checklist than accurate descriptions of risk categories.  If I had my way I would change them to ‘low risk/ medium risk/ high risk’.  I may be wrong in your case but I suspect many people choose ‘balanced’ simply because they prefer the name, without completing a risk assessment questionnaire. 

It is worth knowing that there are four KiwiSaver providers that give investors an alternative based on their age and timeframe – the so-called ‘life stages’ KiwiSaver funds.  These schemes reduce the weightings to growth assets like shares as the investor ages, so they don’t need to make the adjustment themselves.  You can find the names of the providers on the www.interest.co.nz website.

All Kiwisaver investors should be in an appropriate fund to match their risk profile and achieve their goals.  Investing is as much art as science and it may be helpful to get professional advice.  It is important not to chop and change between funds depending on the mood of financial markets and the performance of your fund.  Investor behaviour like this can have a greater negative impact on long term performance than anything else.  You should undertake a thorough review of your investment goals before making any changes.

As published in the Hawkes Bay Today 22 November 2011 

Shelley Hanna is an Authorised Financial Adviser FSP12241.  Her disclosure statement is available on request and free of charge by calling 8703838.  The information contained in this article is of a general nature and is not intended to provide specific or personalised advice.  If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz.

Job loss and KiwiSaver contributions

QUESTION:    Several months ago I became redundant from my job and have not been able to find another suitable position since.  However, I am still able to make lump sum payments to my KiwiSaver. To date, I have been able to put in enough funds to qualify for the Government tax credits for the current year and am contemplating adding more lump sum payments from time to time, over and above the necessary $1042 p.a.  In the light of the economic downturn in both Europe and NZ, do you think it would be prudent to add to my KiwiSaver account in this way, or do you think it would be better to put any extra savings I have on an interest-bearing account with my bank?  I don't qualify for NZ Super for another 6 years.

ANSWER:       First of all, well done for continuing with your KiwiSaver contributions despite losing your job.  For every dollar you are contributing at the moment (up to $1042 p.a.) you will get 50c from the Government. 

The global financial crisis has had a negative impact on most of the higher risk KiwiSaver schemes and volatility is likely to continue for some time. 

Even though it is the one question that you really would like answered, it is impossible for me to predict whether your Scheme will do better than bank deposits over the next 6 years.  Many fund managers aim to achieve ‘better than bank’ returns, but always with the proviso that they may not succeed.  With a timeframe of 6 years there is a reasonable expectation that it may, but looking at the past 6 years I wouldn’t stick my neck on the block on this one. 

Putting aside the uncertainty around returns (and not knowing your risk profile), there are other reasons that a person might consider putting additional funds into their KiwiSaver scheme, over and above the minimum to get the Government top-up.  Compared with other managed funds, the fees on KiwiSaver are generally lower because they are closely monitored by the regulators and they have economies of scale.  So an investor may choose to consolidate several investments into their KiwiSaver.

Your KiwiSaver is locked in to age 65, except in certain situations.  For some people this may be an advantage.  Funds you can access are more likely to be spent.  We all have our weak points and clever marketing people are always looking for ways to part us from our savings. 

Also, many people your age have sons and daughters who come to them for loans.  If your savings are locked away, it is easier to say no.  On the other hand, you may prefer to have the extra funds accessible for yourself or your family, in which case you shouldn’t lock them up in your KiwiSaver. 

There are some who fear that building up a large balance in KiwiSaver may disadvantage them when they apply for NZ Super, in case the Government introduces income or asset testing.  I sent enquiries to both David Cunliffe and Bill English on this point on Monday 21 November.  David Cunliffe answered promptly saying in part:

"No. Labour's policy is to guarantee NZ Super at 66% of the average wage. Universal Kiwisaver will not change this. Kiwisaver will be available from 65 years as now and can be accessed for first home mortgages and hardship as now.”

By deadline I had not yet had an answer from our Minister of Finance, although the Ministerial Assistant sent me a routine response that my enquiry had been forwarded.  I guess he’s had a busy week.  It’s an issue I would like to address in more detail in the near future so I look forward to his reply.

As published in the Hawkes Bay Today 29 November 2011

Shelley Hanna is an Authorised Financial Adviser FSP12241.  Her disclosure statement is available on request and free of charge by calling 8703838.  The information contained in this article is of a general nature and is not intended to provide specific or personalised advice.  If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz.

Is It Time To Jump Ship?

QUESTION:    My wife and I belong to two different KiwiSaver schemes.  Mine is an active growth fund with quite high fees while hers is a passive growth fund with lower fees.  We are self employed and contribute $100 each month.  My scheme has done much better than hers – it’s worth $11,300 compared to hers at $9,750.  Should she change to a better performing fund?

Answer:  There may be several reasons to change schemes, and performance is only one of them.  There are other important issues such as investing philosophy, fees, and communication. 

First, the facts.  If you have been a member since inception, you will have contributed $5100 yourself and received $5171 in Government contributions – a total of $10,271. 

Comparing that figure with the current value, your scheme has gained 10% while your wife’s has lost 5%.  As you are both in growth funds, this variation is well within the range of expectations.  Growth funds have a larger percentage in shares which can fall by 20% or more.  Over the past 4 years we have experienced a global financial crisis which is still making its presence felt particularly in the US and Europe.  This has severely dented confidence in financial markets, and many funds have reported negative returns.  Four years is not a particularly long time period to compare performance between growth funds. 

Fees are often used as a tool of comparison between funds.  An active manager may charge higher fees (including a performance fee) but that fee might be justified by higher returns.  So basing your decision on fees alone is not enough.

Communication and access to information are also important.  Some investors like to get ‘under the bonnet’ of their scheme and know how and why the manager makes investment choices.  Other investors are not that interested in where their money is invested, but they still like to be able to check their current balance quickly and easily.  You don’t want a year to go by before you discover that you didn’t get all the tax credits that you were entitled to.  If you haven’t been checking your balance online at least every 6 months I suggest you begin doing so. 

There are dozens of providers and many funds to choose from.  The providers range from large banks to boutique fund managers.  The fund spectrum goes from low risk cash to high risk shares, from passive to active, hedged and unhedged.  There are also ethical or socially responsible funds available, as we discussed last month. 

Your question cannot be answered completely within in the scope of this column.  You may like to discuss the issues further. Only an Authorised Financial Adviser (AFA) can give advice on KiwiSaver. You can search for an AFA on the website of the Financial Markets Authority (FMA) at www.fma.govt.nz.  It also gives guidelines on choosing and working with an Adviser.  There are 23 AFAs in Hastings and 28 in Napier.  Not all will specialise in KiwiSaver but it is worth a phone call to find out. 

Published in the Hawkes Bay Today 8 November 2011 

Shelley Hanna is an Authorised Financial Adviser FSP12241.  Her disclosure statement is available on request and free of charge by calling 8703838.  The information contained in this article is of a general nature and is not intended to provide specific or personalised advice.  If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz.

KiwiSaver Fees Not A Big Issue

QUESTION:  I am worried about the impact of fees on my KiwiSaver savings.  How do I find out what they are and the impact they are having on my scheme?

ANSWER:       KiwiSaver fees have been in the news lately.  You might have heard Green Party Co-Leader Russel Norman saying that people could save up to 40% or $64,000 in fees over the lifetime of their savings by investing in a lower cost fund.  Is this a pre-election attention-grabber?  Let’s take a closer look.

KiwiSaver fees are scrutinised by the regulators and are required to be ‘not unreasonable’.  Just the other day NZ Herald business writer (and Hawkes Bay local) David Chaplin analysed all fees and expenses as reported by providers and came up with the rather modest figure of 1.4% of funds under management as an industry average.   Contact me if you would like to see his figures.

To find out what fees are deducted from your fund, go to the investment statement and find the page entitled “What are the charges?”  Fees are taken out before the unit price is calculated.  You may also be paying an admin fee of around $3 per month and you will see this on your statement. 

If you want to find out how your fund compares with other funds, there is a great calculator on the ‘Sorted’ website.  You will pay lower fees if you are in a passive fund (which tracks an index) or a cash type fund.  Active funds - which rely on the skills of the manager to aim for higher returns – will generally charge higher fees.  

According to the ‘Sorted’ calculator, a person aged 40 earning $60,000 per year will pay between $3,460 and $16,900 in fees over 25 years.  

So where did Russel Norman get $64,000 from?  To achieve a saving of 40% or $64,000 (in today’s dollars) we’re talking total fees of $160,000 over the lifetime of your fund.  I struggled to get the Sorted calculator to spit out these numbers.  You would need to be a 20 year old earning $50,000 per annum contributing 8% of your salary into an active boutique fund for 45 years to pay fees of this magnitude.  You have to admit, a highly unlikely scenario. 

Are fees that important?  Compared with the considerable financial incentives to join KiwiSaver, the fees are inconsequential.  The attraction of KiwiSaver comes from the Government and employer top ups – a wage earner on $60,000 and contributing 2% is getting $1.43 for every dollar they contribute themselves. 

Performance is also more important than fees.  If your fund is doing better than most, you probably won’t complain about paying fees.  On the other hand, if you are in a fund with the lowest fees you won’t get any satisfaction if your fund is coming last in the performance race.

You are free to change managers, so if you are not satisfied with your fund you can switch.  That in itself should keep fund managers on their toes, and motivated to deliver value for money to investors.

Published in the Hawkes Bay Today 15 November 2011 

Shelley Hanna is an Authorised Financial Adviser FSP12241.  Her disclosure statement is available on request and free of charge by calling 8703838.  The information contained in this article is of a general nature and is not intended to provide specific or personalised advice.  If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz.

Government has provided strong KiwiSaver incentives

QUESTION:    I haven’t joined KiwiSaver because I don’t trust the government.  Why should I join if they can keep changing the rules?

Answer:  KiwiSaver is governed by the KiwiSaver Act 2006.  Changes are not made lightly.  Some changes might improve the scheme while others might make it less attractive.  If you join and then decide it’s not for you, you can take a contributions holiday any time after twelve months (or earlier if you’re experiencing financial hardship).  The self-employed have even more flexibility and can stop and start as they wish.

The government has provided strong cash incentives for people to join and membership has exceeded their expectations.  Those savers who have been in KiwiSaver from the start have received up to $5168 from the government, if they have been saving at least $87 a month themselves.  That money from the government – the ‘kickstart’ and annual tax credits of up to $1042 - has gone into their KiwiSaver accounts.   In most cases, it will stay there increasing in value until they can access it at age 65 (or after 5 years if they joined after age 60).  Even though the tax credit has been reduced to $521 per year, KiwiSaver is still a generous scheme. 

There are now around 1.8 million New Zealanders signed up to KiwiSaver.  The largest group of KiwiSaver members is children (age 0 – 17) with nearly 300,000 (as at 31/3/2011 - according to the official KiwiSaver website).  So a large number of New Zealand parents and grandparents have made the decision on behalf of their children, to get the $1000 kickstart.  The second largest group is the 55+ age group, whose retirement is fast approaching. 

The ‘sorted’ website is a great place to start if you want to do some sums on KiwiSaver.  It has two very useful calculators:  one shows how much you will save if you join KiwiSaver and another one allows you to compare the fees of the various providers. 

Those who say that they don’t trust the government may think that their savings will somehow be taken away from them.  This will not happen.  The government does not have access to KiwiSaver accounts.  The government can put money in (via Inland Revenue) but they cannot take money out.  KiwiSaver is like a bank account in your own name, looked after by a fund manager and a trustee.  You choose the type of fund, from low risk to high.  KiwiSaver is highly regulated.  You will get regular statements from your fund manager.  You can sign up for regular informative email updates.  You can view your account balance online with a user name and password. 

If you are still not convinced, talk to friends who are in KiwiSaver and find out if they are happy with their savings.  They might just provide the motivation you need to sign up.

Shelley Hanna is an authorised financial adviser FSP12241.  Her disclosure statement is available on request and free of charge by calling 8703838.  The information contained in this article is of a general nature and is not intended to provide specific or personalised advice.  If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz.

Published in the 'Hawkes Bay Today' 1 November 2011

How Green Is Your KiwiSaver?

QUESTION: I have never felt comfortable with investment markets so I haven’t joined KiwiSaver.  I have been reading your column about the benefits of KiwiSaver and am having second thoughts.  Are there any socially responsible KiwiSaver funds available?

Answer:  Socially responsible investments have become more popular over the past 10 years with the increase in awareness of environmental and ethical issues.  Many leading fund managers in New Zealand are taking social responsibility more seriously, and apply a ‘green filter’ to the investment choices for their funds. 

You can go more green than this.  There are six socially responsible (or ethical) KiwiSaver funds listed on the website www.interest.co.nz.  You can find their investment statements online and read up on how and where they invest.  If you would like to discuss your options with someone, talk to an Authorised Financial Adviser. 

A socially responsible KiwiSaver fund will generally use a negative screening process to avoid investing in companies involved in weapons manufacture and sales, gambling, tobacco, the fur trade, pornography, cosmetics involving animal testing, and nuclear energy.  They may also screen out companies operating in countries known for human rights abuses including North Korea, Iran, Myanmar and parts of China including the Xinjiang and Tibetan regions; countries that support commercial whaling, and any country known to be developing weapons of mass destruction. 

Some socially responsible funds will apply the negative screen above but also go further with a positive screen.  They will invest only in companies that are making a positive contribution to environmental, social, humanitarian and sustainability issues.  For example, this positive screening process may allow investment in certain agricultural and forestry activities, products that reduce environmental damage, and renewable energy technologies.  They will also look for companies with good employment practices, effective anti-corruption controls, good environmental management and transparent communication.

Any KiwiSaver socially responsible fund will probably have a component of fixed interest and this may be invested in government bonds within the OECD, but not in undemocratic regimes or countries with a high degree of corruption. 

The jury is out as to whether socially responsible funds perform better or worse than mainstream funds, so don’t invest with the expectation that your fund will outperform all other funds.  A fund manager with an open mandate may be free to invest, say, in uranium mining if that sector is likely to outperform.  Your socially responsible fund has a smaller field of investments to choose from, so it may under perform at times and may also be more volatile. 

By now you will have realised that there is a lot involved in selecting a socially responsible or ethical investment.  You will need to do your homework and select the fund that you feel best matches your ethical convictions, while meeting your investment objectives as well.

As published in the Hawkes Bay Today 25 October 2011

Shelley Hanna is an authorised financial adviser FSP12241.  Her disclosure statement is available on request and free of charge by calling 8703838.  The information contained in this article is of a general nature and is not intended to provide specific or personalised advice.  If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz.