NZ Herald 16 November 2024

AI strongly recommend you and your husband both move to low-fee KiwiSaver funds.

When we choose a KiwiSaver or other investment fund, the only thing that really matters, of course, is performance — the dollars in your account. So why worry about fees?

If we buy a car, a coat or a catamaran, the more we pay the higher the quality. But this is not true in KiwiSaver and other funds. I’ve been watching fund performance for decades, and there seems to be no correlation between what you pay and what you get. So you might as well pay less.

I just checked the Smart Investor tool on sorted.org.nz, comparing the average 5-year returns of the three lowest-fee funds and the three highest-fee funds in each risk category.

The lowest-fee funds did better in the defensive, growth and aggressive categories, while the highest-fee ones did better in the conservative and balanced categories. In a different period it could well be the other way round.

Why don’t we get more when we pay more? Higher fees are charged by “active” fund managers who employ highly paid people to pick their investments. Lower fees are charged by “passive” or “index fund” managers, who simply invest in all the shares or bonds in a market index, such as the NZX50 or America’s S&P500. This is much cheaper, and passive funds also trade much less often, saving on trading costs.

Active managers put in more work. The trouble is, it’s really hard to pick which investments are going to perform well. If a company is thriving, its share price will already have risen, so it’s not necessarily a good investment.

It turns out that while active managers sometimes make good choices, just as often they make poor choices. Meanwhile, index funds chug along, performing as well as the market that their index covers. Over the years, they do as well as the active funds, with lower fees.

In recent decades, passive fund management has really caught on overseas, and increasingly in New Zealand. There is now a wide range of passive funds to choose from in KiwiSaver,

Providers that offer all-passive or mainly passive funds are Kernel, Koura, and SuperLife. Also, AMP, InvestNow, NZ Funds and Sharesies have some passive funds, and Simplicity’s funds are largely passive, according to Retirement Commission surveys.

For more info about passive funds, sort by lowest fees in the Smart Investor tool on sorted.org.nz. It’s easy to move funds. Just ask the provider you want to switch to.

On your question about moving at your age, lower fees will make quite a difference, even if you spend all your KiwiSaver money at 65.

Let’s say your fund earns 6% a year before fees, and deposits to your account total $500 a month, rising by 2% each year. Your balance now is $30,000. After 12 years, at the highest aggressive fund fee of 2.01%, your total would be $150.000. With the lowest aggressive fund fee of 0.03%, it would be $177,000.

What’s more, many people leave their money in KiwiSaver throughout retirement — which could be for 30 years or more. The difference over 40 years or so would be huge.

By the way, if your husband’s fund performance lately has been disappointing, that’s a worry. The latest Morningstar KiwiSaver report, for periods ending September 30, shows all but four tiny new funds reported positive annual returns in the last year, with the vast majority of returns more than 10%.

Average after-fee returns in defensive funds were an astonishing 11.6%. Then it ranges up to 21.6% for aggressive funds. These are way higher than the 4.3% to 9.1% range over ten years.

It’s funny how we hear lots of complaints when KiwiSaver fund balances fall, but largely silence when they zoom upwards!

AI’m sure that’s true, from talking to teachers I know.

AGood question.

AWell put.

AI doubt if there will be research until a Government has proposed a CGT and is considering whether to apply it to KiwiSaver and other savings.

How are these savings currently taxed? Almost all KiwiSaver and other funds are portfolio investment entities, or PIES. You tell the provider your PIE tax rate, called your PIR. The provider then pays your tax for you. But it’s still interesting to know how different assets are taxed:

• New Zealand and Australian shares: You are taxed only on dividends — not on any capital gains or losses when the market rises or falls. Also, NZ shares benefit from dividend imputation. To the extent the dividends come out of profits taxed at the company level — and most dividends do — the dividends are not taxed again.

  What’s more, if your PIR is less than the top 28%, (other rates are 10.5% and 17.5%) you can use excess imputation credits against other taxable income in your KiwiSaver account. Your provider will take care of that.

• Other overseas shares: These are taxed under the FDR (fair dividend rate) regime. No matter what the return is, your PIE income will be 5% of the value of the shares. It’s a sort of proxy for dividends.
• NZ and overseas bonds: These are taxed on interest received and also gains and losses. Bonds gain value when interest rates fall, because the bonds in the fund were issued at what have become older higher rates. On the other hand, when interest rates rise, bond values fall.
• Cash. Tax is paid on interest earned.

By the way, employer contributions are also taxed, which is why your 3% contribution is larger than your employer’s 3% contribution.

What might happen under a CGT? I wouldn’t be surprised to see PIEs continue. After all, the Government introduced KiwiSaver to encourage retirement saving. It’s hard to see it reversing that.

ANobody is talking about stealing your savings! A new tax might reduce the returns you earn. But it might not even do that, as I say above. Let’s look at your other points:

• Government spending. I bet there’s heaps that you benefit from, such as roads, police, healthcare and so on. Even if you don’t use much healthcare spending, would you really like to see other New Zealanders sick and dying because they don’t get the care they need?

  Perhaps you dislike regulation, but often it actually does a lot of good, keeping many people, businesses and institutions honest. No one ever likes every type of government expenditure. And there’s always room for improvements. But still, we all like the “system” to keep rolling along.

• Driving the wealthy overseas. Where would they go? Pretty much every country we compare ourselves with taxes capital gains.
• How CGT might affect income tax rates. I think you’re referring to a comment I made about inflation and tax. That’s a different issue. If the government receives new revenue from a tax on gains, clearly it could reduce the tax on income. And it probably would, to help people accept the new tax.

One last point: You acknowledge you’ve been lucky to be paying the highest tax, because it means you’ve earned plenty. It reminds me of something a businessman friend used to say: “The only thing worse than paying tax is not paying tax — because you’ve made no profit!”

Would it really be so bad if a portion of the future growth in your wealth want towards helping others less fortunate?

AI’m sure most people would agree with you.

AThat’s a really good point. And it could be one aspect of current and future governments’ responses to the growing inability of people to afford to buy homes. That trend would be more acceptable if long-term leases became more common, and tenants had more rights.