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.

Free Cash for your First Home

QUESTION:  In your column last week you mentioned the First-Home Deposit Subsidy.  How do you qualify for that?

ANSWER:     This subsidy is run through Housing New Zealand for KiwiSaver members.  Anyone who has been contributing to KiwiSaver for three years or more, and wants to buy their first home, should find out if they qualify for the First-Home Deposit Subsidy. 

The First-Home Deposit Subsidy can also be accessed by KiwiSaver members who have owned a home before, but are in a financial position similar to someone who does not own a home. 

Although it is called a ‘Deposit Subsidy’ it is only paid out on settlement day, not before.  Talk to your bank and your solicitor to make sure you can get all the money you need before you sign a Sale and Purchase agreement.

If you apply for the Subsidy you are not obliged to withdraw your KiwiSaver contributions as well, although you may wish to.  This is a separate process, managed by the trustee of your KiwiSaver scheme.

The Subsidy is designed for people on modest incomes to help them buy modestly priced homes.  The income limit for one or two people is $100,000pa.  You can buy a house jointly with more than two people, in which case the income limit is $140,000.  The house should cost no more than $300,000 ($400,000 in Auckland, Wellington or Queenstown). 

For every full year you have contributed the minimum amount of your income or benefit, or a percentage of the minimum hourly wage if you are not in work (being 4% to 31 March 2009 and 2% thereafter) you should be entitled to $1000, up to a maximum of $5000 for 5 years’ contributions.  As KiwiSaver has only been going for just over 4 years, no-one will qualify for the full subsidy yet.  A couple who both qualify could get $8,000 towards their first home now, or $10,000 after 30 June 2012.  If you think you’ll qualify, it might be worth waiting until then. 

When you apply to Housing New Zealand you need to give them full information of your income, your KiwiSaver contributions, the income of anyone buying the house with you, and a copy of the sale and purchase agreement.  Allow at least 4 weeks for the application to be processed.

Does the Subsidy have to be repaid?  Only if you live in the house for less than 6 months.  Otherwise it is yours to keep.  So it is a generous subsidy and a good incentive particularly for younger people to join KiwiSaver. 

As published in the Hawkes Bay Today 18 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.

KiwiSaver Help To Buy A Home

QUESTION:  My wife and I joined KiwiSaver in 2007.  Can we cash up our savings to buy our first home?

ANSWER:   Yes you probably will be eligible to withdraw some of your savings, as you have been a member for more than 3 years.  Most if not all KiwiSaver providers will allow their members to make a withdrawal to buy their first home.

Assuming you qualify, you (and your wife) should be able to withdraw all your own contributions and your employer contributions.  However, you can’t withdraw any Government contributions – that includes the $1000 ‘kickstart’ and the annual member tax credits.  You can continue contributing to your KiwiSaver after you have bought the house, or you can apply for a contributions holiday if money is very tight.

The home you intend purchasing must be for you to live in; it can’t be a rental or investment property.  

Your KiwiSaver provider will have a First Home Withdrawal Application Form for you to fill out.  The trustee of the scheme will then consider your request. 

Don’t expect the funds to turn up in your own bank account – they will be paid to your solicitor’s trust account to await settlement.  You will need to provide information from your solicitor including a copy of the sale and purchase agreement and confirmation that the agreement is unconditional.  If for any reason you do not go ahead with the sale the money will need to be returned to your KiwiSaver account.  Involve your solicitor at an early stage, before you sign a sale and purchase agreement.

You may also qualify for the First-Home Deposit Subsidy administered by Housing New Zealand.  This is worth $1000 for each year you have been contributing the minimum percentage or more to KiwiSaver (up to a maximum of $5000 for 5 years’ contributions).  If you live in the house for less than 6 months you will have to repay the subsidy, otherwise it is yours to keep. 

Read the useful booklet from Housing New Zealand entitled “Buying Your First-Home with KiwiSaver”.

I assume you joined KiwiSaver with the intention of using some of your savings towards your first home, and are invested in a lower risk scheme?  I ask because with recent volatility some of the higher risk KiwiSaver funds have fallen 10% or more over the past 6 months. 

All KiwiSaver investors need to take into account both their risk tolerance and their timeframe when choosing what fund is right for them.  If you need help, talk to an authorised financial adviser.

As published in the Hawkes Bay Today 11 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.

What happens to KiwiSaver in separation?

QUESTION:  My partner and I have separated after more than three years of living together.  We don’t have any children.  We are dividing our assets between us without involving lawyers.  My husband says that his KiwiSaver can’t be divided as he can’t access it until he’s 65.  Is that correct?

ANSWER:  I am not qualified to give you legal advice, but as far as KiwiSaver is concerned it is an asset like any other savings and should be included in any division of your property.  KiwiSaver Scheme Rule 7 says the courts can make an order to release funds from a KiwiSaver scheme under section 31 of the Property (Relationships) Act 1976.

As the balances in KiwiSaver grow over coming years this will become more of an issue for couples separating, especially if one of them earns significantly more and has built up a larger account balance.

KiwiSaver started more than four years ago, so if your partner joined before you entered the relationship then his contributions from that time may be treated as separate property.  All contributions from the time you became a couple will be considered joint. 

I note that you do not intend to seek legal advice.  I suggest you reconsider.  It is best to get legal advice at the earliest stage of your separation so that you can be clear about what you are entitled to.  You can also have free joint counselling (through the Family Court).  Most people take legal advice and go on to resolve their property issues by negotiation and agreement. Only if agreement cannot be reached will an application be made to the Court. 

Once you have valued all your assets and deducted all your liabilities you can work out how to divide everything equally between you. 

A Court

order would be required to access some of your partner’s KiwiSaver account – you would file a claim with all supporting evidence to the Trustee of the fund.  However, it may be possible to leave your partner’s KiwiSaver scheme intact if you can get other assets of equal value.  

Even if your separation is amicable, independent legal advice will help you to achieve the best outcome.

As published in the Hawkes Bay Today 4 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.

Mortgage no excuse not to join KiwiSaver

QUESTION:        Should I join KiwiSaver or pay off my mortgage first?

ANSWER:  Usually repaying debt takes precedence over savings.  This is because with debt there is a certainty of having to pay interest every day, while the return on investments can be uncertain.

However, with KiwiSaver there are more factors than just investment return to consider.  Let’s assume you are on a salary of $60,000 pa and contribute 2% of your income ($1200 pa) to a KiwiSaver account.  On top of your contributions you will also get 2% from your employer, plus $521 from the Government in ‘tax credits’ each year.  This equates to a return of 143%pa on your investment of $1200.  With mortgage rates starting at around 5.6% pa, this is considerably better than the ‘return’ you would get by putting an extra $1200 on your mortgage each year.

Those who say “I am not going to join KiwiSaver until I’ve paid off my mortgage” are missing out on years of Government contributions and employer contributions as well if they are in paid work.  And how many are actually putting that 2% onto their mortgage instead of into KiwiSaver?

I believe that many people use their mortgage obligations as an excuse not to sign up to KiwiSaver, when in fact they just haven’t got round to it.  Inertia is recognised as a major contributing factor to the behaviour of investors in schemes like KiwiSaver.  It works both ways - the majority of those who are automatically enrolled stay in but if they have to sign up, many don’t.  Evidence of this behaviour was confirmed by research into KiwiSaver membership commissioned by Inland Revenue in early 2010.

In a few cases it would make sense to deal with your mortgage first, for example if you are on such a high income that 2% would make a considerable difference to your mortgage balance and/or if your mortgage is very large and causing you a great deal of worry.

But if you have just been using your mortgage as an excuse not join KiwiSaver I suggest you reconsider. 

As published in the Hawkes Bay Today 27 September 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.