NZ Herald 12 September 2020

AYes, you’re missing something very important.

But first, I admit that my example last week was a poor one. I said that if a self-employed person, or any other non-employee, contributes about $87 a month — or $1,042 a year — they will get the maximum government contribution of $521. And that means that their savings are multiplied by 1.5.

So far so good. But I added, “If you would have retired with $100,000 outside KiwiSaver, you will instead have $150,000.” More typically, it would be half those numbers — $50,000 and $75,000.

Still, it’s possible for someone contributing $1,042 a year to have more than $150,000 in KiwiSaver at 65. It works if they contribute from 18 to 65, which is 47 years, and earn returns averaging 3 per cent a year after fees and tax.

It also works for someone starting at 28 and contributing for 37 years into a higher-risk fund with returns averaging 5 per cent a year.

How come? It’s all thanks to compounding returns over long periods.

Compounding happens whenever you reinvest your returns. Let’s say you contribute $100 at the start of each year and earn 5 per cent on it.

At the end of the first year you have $105.

After the second year you have $215.25 — last year’s $105, plus $100 of new contributions, plus returns of $10.25.

After the third year it’s $331.01 — last year’s $215.25, plus $100, plus returns of $15.76.

After the fourth year it’s $452.56 — last year’s $331.01, plus $100, plus returns of $21.55.

After the fifth year it’s $580.19 — last year’s $452.56, plus $100, plus returns of $27.63.

After the sixth year it’s $714.20 — last year’s $580.19, plus $100, plus returns of $34.01.

Enough! The key point is that each year’s total grows by more than the previous year’s total. The growth gets bigger and bigger and bigger. And when that goes on for 37 or 47 years, the effect is powerful:

• In our 47-year scenario, more than half the retirement total will come from compounding.
• In the 37-year scenario, close to two thirds will be from compounding — because of the higher return. (See graph).

What’s more, many people sometimes contribute extra to their KiwiSaver account, boosting the compounding growth even further.

Note that this applies to anyone aged 18 to 65 who is not an employee, including care givers and beneficiaries.

For employees, it’s better still. If you earn less than $60,000 a year, government and employer contributions more than double your contributions, so your savings grow even faster.

It’s not quite as good for those on higher incomes, because of the $521 cap on government contributions. But still, the contributions of an employee earning $200,000 are multiplied by 1.76.

The moral of the story: in KiwiSaver or any other investment, if you start early and continue for many years you will benefit hugely from compounding.

ATo clarify for others, with an offset mortgage the balances in your other bank accounts are subtracted from your mortgage balance, so you pay interest on a lower amount. And you can also include the bank accounts of other family members.

The downside is that all those accounts receive no interest — although these days that’s not much of a sacrifice.

Last week’s article noted that if parents help their adult children in this way, the parents’ account is still in their name and only they can access it, or pull out of the arrangement whenever they want to.

But you raise an interesting question about whether a mortgage default would affect the parents. All three major banks that offer these loans — BNZ, Kiwibank and Westpac — say no.

The only risk to the parents is if they are either joint borrowers or guarantors on the mortgage. “As one of many forms of parental assistance this is definitely a low risk option,” says a Kiwibank spokesperson.

ALet’s hear from others on lower pay — and not just single women — who have come up with unusual ways to get that deposit together.

ALast week’s correspondent had only about $500 in Bonus Bonds, and I suggested she wait for the wind-up as a final “gamble”. But people with large amounts invested need to take the decision more seriously.

You hold a senior role in the financial world, and your opinion is worth listening to. So I asked ANZ for comments on what you say.

Unfortunately, their reply doesn’t give us much help on how much the likely pay-out will be — basically repeating what’s been said before.

“The amount returned to bondholders who remain in the scheme at wind-up will depend on how much remains in the scheme’s reserves — which is the difference between the market value of the fund (the net assets of the Scheme) and the bonds on issue — when the scheme is wound up. The reserves stood at more than $100 million when the decision to wind up the scheme was made on 26 August,” says a spokesperson.

“Expenses, the number of bondholders remaining in the scheme when the wind-up process starts and the actual price we realise for the scheme’s assets will all influence the level of reserves, which will be distributed to remaining bondholders. The ANZIS board believes reserves are sufficient that bondholders can be confident they will receive back their initial investment.”

He adds, “The Board has agreed to reduce the management fee to 0 per cent from 1 September, so ANZIS does not get any financial benefit from delaying payments to investors.”

If other readers want to take our correspondent’s advice, and take the money and run, they should get on with redeeming their bonds. ANZ has said it will start the wind-up no later than October 31, but it may start earlier, “if demand for redemptions exceeds the cash available to repay redemptions.”

AThat’s a rather cynical comment about what ANZ will tell you. You’re going to have to trust them, as I doubt if anybody else will have that info.

Here’s what a bank spokesperson says: “If a wind-up is initiated we are required to write to customers within 14 days of the decision. We keep a register of all customers with Bonus Bonds.

“However, if customers haven’t bought or sold bonds recently or let us know about changes to their details this information may not be up to date, so customers may not receive a letter.” So it’s up to you to get your latest information to the bank.

What advice does the bank give for people struggling to find proof of their Bonus Bonds holdings?

“To help us locate their Bonus Bonds, we’d ask customers to locate any documents relating to their Bonus Bonds, for example, a Bonus Bonds Certificate or a bondholder card,” says the spokesperson.

“If they don’t have those, they should provide information that might be useful, such as old residential addresses or previous names they might have used (such as a maiden name). The more information the customer can provide, the easier and faster it will be for us locate the bondholding (if any).”

And what about people like you who think a deceased relative may have had unredeemed Bonus Bonds?

“We ask customers to provide us with as much detail as possible on any deceased estate to help us return the funds to the rightful owner. This could include a copy of the death certificate and in some cases a will.

“We have a deceased estates process to manage these, but the exact steps required will vary depending on the complexity of the estate and the size of the investment.”

He adds, “Please note that there is no need to do anything immediately. It will be some time before any funds are transferred to Treasury as unclaimed monies, and if a wind-up is initiated there will still be an opportunity for family members to get in touch with us.”

On your comment about unclaimed money going to Treasury, he says, “The Trusts Act 2019 requires us to forward unclaimed monies to Treasury via The Supervisor.

The money joins unclaimed money from all sort of other sources, including trusts, superannuation, government bonds and even unclaimed property left at hotels, motels and other lodgings. People can get it back by making a claim. I’m not sure what other arrangement would be fairer.