Riding the ups and downs

QI’m 76 and had $120,000 in ASB’s Moderate KiwiSaver Fund four years ago. After losing about $10,000 12 months ago, I converted to their Conservative Fund, not wanting any more downward fluctuations.

Since January 2024, when I began monitoring my balance, it has gone up, then down over a $1,000 range. I don’t need the funds currently, but am dismayed at the lack of progress, especially when bank fixed deposit rates are about 6 per cent, returning about $7,000 less tax. What to do?

AYour numbers don’t seem right. The Smart Investor tool on sorted.org.nz tells us that ASB’s Moderate Fund reported losses of minus 1 per cent after fees and tax in the year ending March 2022, and minus 1.7 per cent in the following year — about average for funds in that risk category.

They were not good years. But those two losses should have reduced your balance by around $3,000 to $4,000 in total, not $10,000. What’s more, the previous year the fund grew by a very healthy 12.1 per cent after fees and tax. So your balance should be well ahead of your initial $120,000. (In the latest year, the return was 8.4 per cent — but you were out of the fund by then.)

You might want to check your numbers, and ask ASB for clarification if you’re in doubt.

The broader point, though, is that — unlike many things in life — it’s not wise to watch your KiwiSaver balance closely. Once a year, when your annual statement arrives, is often enough — although even one-year performance is pretty meaningless. To get a good feel for how a fund is doing, it’s best to look over ten years or more.

Any time any reader is concerned about their KiwiSaver fund, I strongly recommend checking the info about the fund on Smart Investor. It tells you the types of investments, the biggest ten investments, ten years of returns, how the fund compares with others at the same risk level on fees and returns, and much more — in an easy-to-understand format. Coming soon, there will also be info on each fund’s performance on ethical issues.

In your case, you would find that in the ASB Moderate Fund, 43 per cent of the investments are in growth assets, almost all shares. The rest is mainly in bonds.

With a mix like that, you’re going to get considerable ups and downs. And indeed, Smart Investor shows us that returns — after fees and tax — have been slightly negative in three of the last ten years ending in March.

But the fund also earned a little over 10 per cent in 2015 and — as already mentioned — about 12 per cent in 2021 and 8 per cent in 2024 — not bad after fees and tax.

Your current ASB Conservative Fund has considerably less — 25 per cent — in growth assets and about 63 per cent in bonds, with the rest mainly cash.

Normally we would expect a relatively smooth ride in such a fund. But as a result of the extraordinarily rapid rise in interest rates in the last few years, funds with lots of bonds — many issued at lower rates before the rate rise — took a hit. You fund lost 2 per cent in 2022 and 1 per cent in 2023.

In the better years, returns were 7 per cent in 2015, 6.5 per cent in 2021, and 6 per cent for the year to March 2024.

When comparing these returns with term deposits, remember two important things:

  • The impact of tax. You mention this, but it needs to be underlined! The fund returns in Smart Investor are all after tax. In term deposits, 6 per cent becomes between 3.66 and 5.37 per cent after tax, depending on your tax bracket.
  • Deposit returns have been around 6 per cent for only a short while. Ten years ago, six-month rates were about 4 per cent, according to the Reserve Bank. But they then dropped to as low as a tiny 0.8 per cent in early 2021. It’s only in March last year that they rose above 5 per cent. And experts predict they will fall again fairly soon.

So where does all this leave you? Given your nervousness about drops in your account balance, it’s probably wise that you moved to the lower-risk conservative fund. That fund is unlikely to report many more losses in future, although there are no guarantees. On average, it’s likely to beat term deposits over the longer term.

But if you want even less volatility, you could switch to your provider’s NZ Cash Fund. It would be astonishing to see it report negative returns, but it will have lower average returns. If that’s not “safe” enough, go with bank term deposits — and accept their returns will almost certainly decrease soon.

When you move provider

QMy daughter changed KiwiSaver provider at the start of April. She has received a letter from her new provider indicating that, as she has contributed with them less than the $1,042 to qualify for the full Government boost of $521, she may like to top up her account with a voluntary payment before the end of June.

She was with her previous provider for many years and has — through her contributions with them since 1 July 2023 — easily met the $1,042 minimum.

I see the IRD website says it is the responsibility of the KiwiSaver provider to claim the government contribution on behalf of the member, but what about her contributions made already through the year with her original provider? This issue must arise regularly but your comments would be appreciated.

AYou’re right, this must affect quite a few people each year. But funnily enough, I’ve never considered it before.

To get others up with the play, if you’re aged 18 to 65, the government will contribute 50¢ to your KiwiSaver account for every dollar you contribute between 1 July 2023 and 30 June 2024 — up to a maximum of $521 if you put in $1,042 or more.

In your daughter’s situation, assuming she contributes to KiwiSaver through her employer, all should be okay.

“In this scenario the member just needs to check how much she has contributed since 1 July 2023,” says an Inland Revenue spokesperson.

“She can do this via myIR or looking at her pay slips. If she has contributed at least $1,042.86 then she will receive the full GVC (government contribution) when her new provider claims GVC for her in July. The new provider does not include the amount she has contributed in the GVC claim as IR already has this information.”

She adds, “It’s likely that she has received the letter from her new provider because they will have only seen the contributions she has made since she joined them.”

Still, good on the new provider for writing — even though it wasn’t necessary in this case. Too many KiwiSaver members are missing out on the government money.

Pay attention please!

QI didn’t know this, and so other people may not know it either, but it is possible to contribute to KiwiSaver after turning 65 and still get the government subsidy.

I turned 65 two weeks into July last year, and I should have contributed about $40 to get the subsidy of $20. But it didn’t occur to me at the time. Turns out that I still have till June 30 this year to contribute that $40, even though I’m almost into my 67th year. Who knew?

PS. Since you have awarded me in your book the title of your bossiest reader, I feel obliged to maintain my reputation. I’m complaining about your email address, which is a tautology. Life is short after the age of 65 and I have better things to do with my time than type “mary” twice. Best you fix that or it’s another trip to the headmaster’s office!

AOh gosh. Sorry, but it would be too complicated to change my email address at this stage. Seems I’ll have to face the music.

Meanwhile, you asked who knew about your KiwiSaver tip? Well I did actually — along with others who have read about this in the column before. Your turn in the head’s office for not paying attention!

To repeat my message — sigh! — in the year you turn 65, your KiwiSaver government contribution is proportionate to how much of the July-to-June year you are under 65.

With the maximum annual contribution at $521, that’s $10 a week. So you’re quite right. Two weeks of being a pre-pensioner should qualify you for $20 from the government, as long as you deposit at least twice that. And — perhaps in a gesture of generosity, although probably just because it’s administratively easier — you can put in your $40 any time in the KiwiSaver year.

Deposit versus mortgage paydown

QJust want to question your comment last week that it’s better to invest in a 6 per cent term deposit rather than pay down a 3 per cent mortgage. Doesn’t it make sense to reduce your mortgage as much as possible while the rate is low, knowing that it’s very likely to go up? By doing so, you’re saving money on paying a future higher rate!

ASorry, but that’s not how it works.

Firstly, let’s clarify that we’re comparing paying down a 3 per cent mortgage with investing in a 6 per cent term deposit that pays 3.66 to 5.37 per cent after tax.

Still, that term deposit return is more than the mortgage rate. So the best tactic is to put the money in term deposits that mature just before the end of your mortgage term. You will then be able to pay a lump sum off the mortgage that will lower the balance more than if you had put the money directly into reducing the mortgage.

A side issue: In many cases there’s a penalty for paying extra off a fixed mortgage during its term. If that’s the case, that strengthens the term deposit argument.

Also, if you save in term deposits you have the flexibility of using that money for something else if an emergency arises.

Giving to the grandkids

QI’m a grandparent to eight — wanting to gift $50,000 to each with the specific intention of putting it into a house. What are the tax implications for me?

If I end up in care at some stage in the future, is there a government clawback for the amount gifted? Would there be less complications if I left it to them as a legacy in my will?

AThere’s no gift tax in New Zealand and no other tax ramifications of your plan. But sadly for your grandkids, they might have to wait for that generous gift because you’re right, making gifts can affect your eligibility for a residential care subsidy if you end up in care.

The basic rules are as follows. The subsidy won’t be affected if:

  • You gave away no more than $27,000 worth of assets in any one year, more than five years before applying for the subsidy.
  • And you gave no more than $7,500 worth of assets per year, during the five years before applying for the subsidy.

If you have given away more, that extra amount will be included in your assets when deciding on your eligibility for the subsidy.

This is tricky stuff, as it’s impossible to know the future. So yes, it would be much less complicated if you leave the money to the grandchildren in your will.

A note to other readers: I went into the residential care subsidy and gifting in some depth in several columns, last October 28 and November 4, 11 and 18. So please don’t send me further questions about it.

For more info on the Residential Care Subsidy, see here and here. Or you can phone the Residential Subsidy Unit on 0800 999 727 or email [email protected].

We’ll have more on giving money to offsprings’ KiwiSaver accounts next week.

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Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former 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.