Plus:Readers’ views on KiwiSaver
QI hope you will have space to give your views and answer questions on the new Deposit Guarantee Scheme.
For example: Has it been passed into law already? How can the public check which banks and finance companies are covered?
Is the protection the same for money in current accounts and in term debentures?
Does it include accrued interest or only the original capital sum? Does it include money already deposited/invested or only that lodged with the bank etc after the scheme came into force?
Would it be possible for a finance company to be accepted for the Scheme then subsequently accept money from the public on terms that fall outside the original acceptance. If so, how would the public know before it was too late?
If a finance company covered by the scheme were to fail, what in general terms would be the procedure and approximately how quickly could investors expect to be compensated?
I haven’t seen answers to the above anywhere else to date, so I expect I’m not alone in wondering what to do next.
I have a Marac debenture which matures next month. I had intended taking the money out and sitting on it, but now……???
ALast question first. Marac says it has applied to be included in the guarantee scheme, but no company — not even the major banks — has been approved yet.
Treasury boss Dr Peter Bushnell says his department “will work quickly to ensure that applications are processed and approvals made public. We expect this process to take a matter of days.” So keep an eye on the news or keep in touch with Marac.
On your other questions:
- The scheme — which covers deposits for New Zealand-registered banks and eligible non-bank deposit-takers (including building societies, credit unions and finance companies) — hasn’t been passed into law. It doesn’t have to be.
“Parliament is not sitting, and therefore legislation can’t be introduced. However, the (Finance) Minister has powers under the Public Finance Act to act in this way,” says the Reserve Bank.
That means the scheme took effect from October 12 — although no deposits are covered until the financial institution is approved.
- The Reserve Bank says it will publish a list of guaranteed institutions on its website, www.rbnz.govt.nz. Watch out for it.
- The protection covers debt securities, which include: deposits, term deposits, current accounts, bonds, bank bills and debentures.
Most KiwiSaver accounts and other unit trusts and similar investments are not covered — even if they are run by a bank or other company that is covered.
The exceptions are KiwiSaver funds or other “collective investment schemes (such as PIEs, unit trusts and superannuation schemes)” that invest only in New Zealand government securities or debt securities issued by banks and other institutions covered by the guarantee scheme.
These funds are covered by the guarantee as long as they don’t increase their investments “in guaranteed institutions that are not registered banks beyond the level that existed as at 12 October 2008,” says the Reserve Bank.
Translation: many ultra-conservative KiwiSaver funds will be covered. But apparently the government wants to be sure these funds don’t increase their investments in guaranteed finance companies — which tend to pay higher interest — just because those companies are in the scheme.
In the last few days questions have been raised about whether ultraconservative KiwiSaver funds run by providers that are neither banks nor finance companies will get the same guarantee, but Treasury says changes will be made to ensure they are covered.
- Interest as well as original investments are covered. And money already invested before October 12 is covered.
- If a guaranteed finance company is kicked out of the scheme, perhaps because it breaches its trust deed, public notice will be given, so I’m sure the media will report it.
The Reserve Bank adds that, “funds invested in the company until the guarantee was terminated will be covered”. If you have a term deposit that matures after the finance company loses its cover, you’ll still get your money back.
- On the procedure if a covered finance company — or any other financial institution — failed, the government says it will make payments to depositors “when due and payable”. I expect, though, that in some situations people’s money might be tied up for at least a short time.
QGiven the government guarantee on deposits, am I better to take my money out of a lower interest bank deposit and put it in a higher risk finance company with a higher interest rate now, if that finance company is government guaranteed.
AMaybe. Obviously you need to be happy with how long your money will be tied up, how frequently the interest will be compounded and so on.
And you’ll have to wait to see if the finance company is covered by the government guarantee. To be eligible a finance company has to be “fully compliant with the requirements of their trust deeds.” Also, it may not “primarily provide financial services or lend to related parties and group members”, and there are other restrictions.
I imagine it might take a while for the government to confirm all that, and give finance companies the tick of approval.
Some of the less respectable finance companies — often the ones that tend to pay highest interest — probably won’t ever get the nod.
And even in the finance companies that are approved, subordinated debt won’t be covered by the guarantee. This is money that’s repayable only after others have got their money back. It’s riskier, and therefore pays higher interest — but without the guarantee I would give it a miss.
You may find that with only the non-subordinated debt of the more respectable finance companies included, there’s not all that much difference in the interest your receive — especially after paying tax — unless you have a large sum and/or invest for a long time.
Some examples, based on current interest rates:
- If you invest $1000 for six months in a bank paying 7.5 per cent, your after-tax interest will be about $23 at 39 per cent tax or $25 at 33 per cent tax.
- The same investment in a finance company paying 9 per cent will give you $27 or $30, depending on your tax bracket. There’s almost nothing in it.
- Even over two years, in a bank paying 6.8 per cent, you’ll get $85 or $93, depending on your tax bracket.
- In a finance company paying 9 per cent, you’ll get $113 or $124. It’s still not much different.
However, with $10,000 you should multiply all the interest amounts by 10, and with $100,000 multiply by 100. Now you’re talking differences worth getting.
Over longer periods, the differences can really mount up on large sums. But at this stage the government’s guarantee lasts only until October 2010. The scheme might be extended beyond that, but unless the international financial crisis is still with us then — heaven forbid! — I wouldn’t count on it.
Another consideration is that even though a company’s deposits are guaranteed, you could still face some hassle — possibly including delayed payments — if it got into difficulties. If I were you, I would still be fussy about which covered finance company I went with.
I must say I was rather surprised to see finance companies included in the guarantee scheme. I suppose the government felt it had to, or they would be likely to lose all their business.
With their inclusion, the opposite might happen. Many people might transfer some money into finance companies, and they might prosper — although there’s a disincentive for lower-rated finance companies to grow fast, as they will be charged a fee based on their growth.
In any case, I suspect most people won’t bother to move their money, unless they have fairly large sums.
Footnote: I said above that finance company subordinated debt is not covered by the guarantee. It’s the same for banks. However, some subordinated debt issued by building societies and credit unions — which is “in substance like a bank deposit” — will be covered.
QI am 62 years old and self-employed.
I was going to put $50 a week into KiwiSaver, but after John Key said what he would do to it if they become the next government I am not so sure.
Do you think that it would still be a good move?
ADefinitely. Under National, KiwiSaver would be unchanged for the self-employed and non-employees. And it’s a particularly good deal for those in their fifties or older.
But I wouldn’t put more than $20 a week in, unless you need to lock the money away to stop yourself from spending it.
Your contributions up to $20 a week, which comes to $1043 a year, will be matched by the tax credit. But if you put in any more, that won’t be matched.
There’s no gain in having an extra $30 a week in KiwiSaver compared with saving it elsewhere — perhaps in a fund similar to KiwiSaver if that suits you. And if you save elsewhere, you can take the money out if you suddenly find you need it.
READERS ON KIWISAVER
Here are some of the winning entries in the Herald’s Money Column giveaway of my new book, “KiwiSaver Max: How to get the best out of it”. To enter, readers had to say in 50 or fewer words what they think of KiwiSaver — good, bad or both.
KiwiSaver’s a terrific scheme!
A ‘nice retirement’ is my modest dream
I look at my payslip and watch it grow –
Little by little. And — don’t you know,
I’ll never be rich but I will be happy.
It’ll make my retirement a lot less crappy!
Retirement… Bring it on!
KiwiSaver is fantastic for people 60 or over! So far I have invested $1043 in July 2007 and now have $3148. In 4 years I will be happy to take it out. Generally I feel it is too heavily subsidised by other taxpayers, whose only recourse is to join up.
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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.