This article was published on 1 November 2014. Some information may be out of date.

Q&As

  • Comparing KiwiSaver and similar non-KiwiSaver funds from the same provider
  • A reader offers some tough rules for family gifts or loans to students
  • Keep others in the know about family loans
  • Misunderstandings about children and KiwiSaver

QReturns from KiwiSaver funds appear to differ from those of similar non-KiwiSaver funds from the same provider. It would be interesting to know the reason.

Are KiwiSaver funds subject to different fees, are they taxed differently or do the funds have different investment content?

I am invested with Fisher and Milford (regular PIE funds). I noticed some differences between them and similar (or identical) KiwiSaver funds.

The figures for Milford Balanced returns are 13.13 per cent for one year and 14.96 for two years, and for the KiwiSaver version it’s 13.82 and 15.36 per cent. KiwiSaver is higher.

For the Active Growth fund it’s 13.92 per cent for one year and 18.05 per cent for two years, and for the KiwiSaver one it’s 13.85 and 18.13 per cent. KiwiSaver is lower for one year but higher for two years.

For the main Fisher non-KiwiSaver fund — NZ Growth — the figures were 11.3 and 18.0 per cent, while their KiwiSaver Growth fund results were 9.8 and 14.9 per cent over the one- and two-year return periods. KiwiSaver is quite a lot lower.

Are there circumstances where one would be better off investing in a non-KiwiSaver equivalent over the long term?

ABefore everyone rushes off to invest in these funds, we should note that while the recent returns are terrific, they are:

  • Not exclusive to Milford Asset Management or Fisher Funds.
  • By no means guaranteed — or even likely — to continue at that pace.

I suspect many people don’t realise just how well the New Zealand and international sharemarkets have been performing over the last few years. Every KiwiSaver and non-KiwiSaver fund with substantial share investments should have produced unusually high returns.

But nobody ever knows where sharemarkets will go next. If anything, after such a period of growth there’s a tendency towards below-average performance.

I’m certainly not suggesting that anyone should move out of share fund investments — KiwiSaver or otherwise. But nor should anyone move into share funds just to chase recent returns. These should be long-term investments. Switching from fund to fund in an effort to time the markets is a fool’s game.

Okay, on to your questions. Tax doesn’t explain the differences in returns. All the funds are PIEs, or portfolio investment entities, so they are all taxed the same way — at slightly lower rates than other income.

The main reason for the quite marked differences in the Fisher Funds performances is that they hold different types of assets, says Michael Raynes, head of marketing and communications.

“The Fisher Funds KiwiSaver Scheme Growth Fund is a diversified fund that invests predominantly in a mix of New Zealand, Australian and international shares. There is also a small exposure to bonds. In contrast the New Zealand Growth Fund invests exclusively in New Zealand companies.”

“While the New Zealand companies that we invest in are the same across both funds, they only make up 25 per cent of the overall KiwiSaver Growth Fund portfolio.”

And in the recent periods, the New Zealand investments performed better than the Australian and international investments.

Raynes points out, though, that it’s good that the KiwiSaver fund invests beyond New Zealand, and I agree.

The story is different for Milford Asset Management funds, where the investments are the same in the KiwiSaver and non-KiwiSaver equivalents.

Still, the Milford funds are separate, and that has some effect on returns, says Sean Donovan, Milford’s KiwiSaver Associate. “New and existing investors move varying amounts of money in and out of the funds each day. This means the level of cash held and the weightings of investments will be slightly different from time to time.”

Both Fisher and Milford’s returns are also affected by differing — and quite complex — fee structures in their KiwiSaver and non-KiwiSaver products.

In answer to your final question, it would be silly to skip KiwiSaver and put all your savings in a non-KiwiSaver fund, because you would miss the government and employer contributions — which make a huge difference to your total savings.

But perhaps what you’re asking is whether you should put extra savings outside KiwiSaver, once you’ve contributed enough to KiwiSaver to get all the incentives. This would apply to:

  • Employees who contribute more than 3 per cent of your pay. If you earn more than $34,762 a year, you could reduce your contributions to 3 per cent and save the rest elsewhere. However, if you earn less than $34,762 a year, 3 per cent of your pay will be less than $1043, so you should first try to get your KiwiSaver contributions up to $1043 a year to get the maximum tax credit.
  • Non-employees who contribute more than $1043 a year to KiwiSaver. You could also save the rest elsewhere.

A big advantage of saving in a non-KiwiSaver investment is that you can withdraw the money at any time. But access might not be an issue for you. Perhaps you’re quite near retirement, or you have other money you can use if needed. In that case, is a provider’s KiwiSaver fund or a similar non-KiwiSaver fund likely to be better?

Apart from access, “with regard to Milford there’s no significant benefit investing in a non-KiwiSaver fund over a KiwiSaver fund,” says Donovan. In Milford’s KiwiSaver scheme there’s a $3 monthly administration and registry fee that doesn’t apply to its other funds. But by the time you take into account other fee differences, “we would expect the fees to be comparable over the long term.”

At Fisher Funds, “If access to capital is not an issue then saving additional money via your KiwiSaver account is a good option,” says Raynes. “The management fees for our KiwiSaver funds are lower than the sector specific funds, and because they are diversified funds we are also actively managing the asset allocation on behalf of investors.”

What about other providers? The story will probably vary from provider to provider. Email your provider and ask.

QI would like to reply to your first Q&A last week regarding the person looking for advice on loaning money to their son for education.

I am a working class person who has been appointed by my sister and her husband along with another unrelated person as trustees of an education fund for their children (who are now adults) and their grandchildren.

Although the money given from the fund would not be paid back, I have pondered the notion that some students these days start a course and often change their mind. Maybe they are not committed to work hard and end up failing especially if the money is given to them. From experience it will be almost inevitable that some, if not all, of the money would not be paid back. I strongly advise against giving a lump sum and only pay on receipts.

My conditions are that they take out a bank loan or student loan to cover their course and expenses. I encourage them to find part-time work. I expect to see data and work showing progress. At the end of each year, receipts for fees and expenses plus interest are reimbursed.

AExcellent advice. It would be a good idea to set up these quite tough rules from the start.

The fact that the student is paying interest on their loan in the meantime is largely offset by the fact that the trust money is earning interest in the meantime. In the case of last week’s couple, they’re going to add to their mortgage so they can lend to their son, so for them the offset is that they are not paying mortgage interest in the meantime.

QWe have a loan situation in our family. While we follow the advice of having the loan in writing and paying interest, we have also had the situation where a member of the family was unable to repay.

In this case other members of the family were either given the same amount or had the same amount forgiven. Obviously this worked because the lender was financially comfortable with this.

A new situation has come up and a family member is getting the use of a financial windfall to help repay a mortgage. However, we are all mindful that this person might not be able to pay it off. In this case it is accepted that it can be taken out of any inheritance due to the borrower.

We are also aware that we may have to financially support the lender if it goes pear shaped.

The main thing is that all members of the family (in-laws included!) are aware of the loan and are aware of the consequences if it doesn’t get repaid.

Open communication about finances has always been important and certainly saves arguments about who got what when. Including partners is important too as it will affect them as well.

AIt certainly makes it easier, when someone is unable to repay a loan, if the lender is in a position to give other family members the same deal. It might not work so well when the lender is adding to their mortgage, though!

You make an excellent point about keeping everyone informed, including in-laws.

Thanks to all the readers who have written about family loans. I’ll publish other letters over the next few weeks, including some that further discuss the idea of taking money owed out of an inheritance if the lender dies.

QWe have a 3-year-old daughter. With no extended family to offer support to her after we leave this world, we are looking at the best ways to give her some financial support in the future.

We are currently looking at enrolling her in KiwiSaver and contributing the minimum to make good use of the government contribution. We are concerned that if we put the money into something she will not be able to access for at least 15 years, should the government change its policy on its annual contributions, can they take away any contributions they have made in the past?

AA nice idea, but you’re misunderstanding a couple of things.

  • The government doesn’t give children tax credits until they turn 18. So, while it’s good to sign up your daughter to get the $1000 kick-start, there’s no particular point in your contributing to her KiwiSaver account.
  • Access to KiwiSaver money doesn’t start at 18, as you seem to think. Generally, you can’t take out money unless you buy a first home or reach retirement. But if you save for your daughter elsewhere, she’ll be able to withdraw money for tertiary education, starting a business or whatever.

On your worry about a future government taking away its contributions, nobody can guarantee that wouldn’t happen. But I can’t imagine a government doing that and hoping to stay in power. I would cross that off your list of worries.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.