NZ Herald 1 November 2025

AI’ll probably get shot for saying this, but I don’t think you did much wrong!

Sure, you should have kept better track of your financial situation. And paying a break fee on a term deposit seems a bit silly. Couldn’t you have waited until it matured?

Also, I can’t help but wonder whether it really mattered that the carpet upstairs was different from downstairs. But hey, if it would have kept on annoying you, you did the right thing.

My main point is that it seems you’ve had a good time in the years you’ve been well enough to travel and to see distant family and friends. Quite often I hear from older people wishing they had spent more in their early retirement.

Now you have a reverse mortgage, which some would frown on. But I think that’s fine given you’re in your 80s. Unless one of you lives to well past 100, there aren’t all that many years for the debt to compound. And, despite the current trend, house values will surely rise over time too.

Having that loan does mean you probably won’t leave a large inheritance. But I don’t think that should drive people’s retirement spending.

A note to other readers: My encouragement to spend up large does not extend to younger people, unless you can easily afford it!

AIt’s disappointing to hear of people suspending their KiwiSaver contributions because they no longer get input from the government and their employer contribution effectively comes out of their pay.

Even for the majority of employees, who earn less than $180,000, getting only the recently halved government input and no genuine employer input is hardly a big incentive.

You sent me a copy of the letter you received from Minister of Revenue Simon Watts dated July 11.

It includes this: “As you are aware, employers and employees are able to agree that KiwiSaver employer contributions are to be deducted from an employee’s gross salary or wages. Employment contracts designed in this way are known as ‘total remuneration’ contracts.

“I appreciate that employment contracts are frequently technical in character. Accordingly, I believe it is important that prospective employees carefully review the terms and conditions of their contracts and seek professional advice if necessary. Doing so ensures that all parties are fully informed of their rights and obligations before entering a relationship of employment.”

What planet are you on, Minister Watts? Sure, executives negotiate contracts. But — especially with jobs so hard to find these days — is it realistic to expect someone offered a lower-paying job to take the employment contract to a lawyer? And then to expect the lawyer to be up with the play on how total remuneration packages affect KiwiSaver incentives? And then to expect the job applicant to bargain with the employer over this?

The KiwiSaver Act of 2006 was set up “to encourage a long-term savings habit and asset accumulation by individuals who are not in a position to enjoy standards of living in retirement similar to those in pre-retirement.

“The Act aims to increase individuals’ well-being and financial independence, particularly in retirement, and to provide retirement benefits.”

Sounds like a good idea to me. So why would a government make changes, and allow employers to set up their pay systems, that prevent KiwiSaver from working?

ANo! Index funds — low-fee share funds that invest in all the shares in a market index, or occasionally all the bonds in a bond index — can be a great investment, but only for money that you don’t expect to spend for ten years or more.

Over a shorter period, there’s a chance the balance will have fallen when you withdraw.

If your children might want to use the money within the next few years, it’s best to put it in bank term deposits — despite recent lower returns — or a cash fund. For more on cash funds, read on.

AAny fund that is called a cash fund will probably invest only in cash or cash equivalents.

Cash means bank savings accounts, term deposits and similar — possibly at higher interest rates than you or I would get because the fund has much more to invest.

Cash equivalents are easily converted to cash, and include high-quality bonds that mature within three months — although some definitions say within a year. Kernel, in a good blog about cash funds, says the investments can include short-term debt securities issued by “large share market-listed companies, partially or fully state-owned enterprises, regulated banks, or governments.”

These investments are also found in other low-risk funds, often called bond or fixed interest funds, but those funds also invest in longer-term bonds. And, as many people learnt a couple of years ago, funds that hold longer-term bonds can lose value when market interest rates rise. That’s because many of the bonds in the fund were issued at older, lower interest rates, so they are no longer worth as much.

Eventually the funds recover, but it can take a while. If you want to withdraw your money in the meantime, it’s not good.

In cash funds, the investments shouldn’t ever lose value — or certainly not much. Says Kernel, “Due to the daily revaluation of assets, it is possible to experience small negative returns (less than 0.05%) for a day or two from time to time, but these are very unlikely to be frequent or long lasting.”

Over two years, Kernel says its cash fund reported no weeks with negative returns. Basically, a cash fund investment should pretty much always grow.

For how a cash fund compares with term deposits, read on.

AComparing returns on cash funds and term deposits is tricky.

For one thing, cash fund returns are often quoted after fees and tax, while the advertised returns on term deposits are before tax.

This makes a big difference. If you’re in the 33% tax bracket, a term deposit paying 3% interest will give you only 2% after you’ve paid your tax.

What’s more, cash funds are PIEs, which means lower tax rates for most people than on ordinary term deposits, though not on term PIEs.

Note, too, that when checking cash fund returns, you are looking back in time — at how the fund performed over the last year, or five years or whatever. But term deposit returns are what you’ll get in future.

When interest rates are trending downwards, term deposits will probably look less appealing than historical cash fund returns. However, the returns in cash funds are likely to also decline in the months ahead.

Of course the reverse is also true. In times of rising interest rates, term deposit returns will look better. But you can also expect cash fund returns to rise in the near future.

Looking beyond returns, there are two clear advantages of cash funds:

• You can get money out within a couple of days. With a term deposit, you generally have to wait until it matures or pay a penalty.
• You can set and forget a cash fund investment. But term deposits mature and, if you’re wise, you look around to see where next to place the money.

On the other hand, most term deposits are protected by the new Depositor Compensation Scheme run by the Reserve Bank. If a covered deposit taker defaults, you get compensation of up to $100,000 per person.

Cash funds have no similar cover — although, because they hold lots of different investments, the failure of one company might not have a huge impact. And generally cash funds make only pretty rock solid investments anyway.

Which to choose? It depends which of the above factors matter more to you.

To find a cash fund, in or out of KiwiSaver, use the Smart Investor tool on sorted.org.nz. Go to Defensive Funds, but note that these include funds investing in longer-term bonds.

Look for the word “cash” in the name, and then check the fund’s major investments, which are listed on Smart Investor.