This article was published on 2 May 2020. Some information may be out of date.

Q&As

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QI am wondering what could happen to my KiwiSaver account if I were to die. My will states that my assets go to my next of kin, who is my husband, or in the event of him being also deceased then in equal shares to my four children.

My query is: would this KiwiSaver inheritance have to be cashed up immediately or could it just be transferred to my dependents, who could then decide to cash it in at a more profitable time than right now?

Also, please, what would be the situation with regards to my small share portfolio, which was worth around $150,000 prior to Covid-19? Would that have to be cashed up or just transferred to dependants to cash up at a later date?

AGosh, the ramifications of a share market downturn! But this is one worry you can wave away.

When somebody with a KiwiSaver account dies, their savings have to be turned into cash to give to their beneficiaries. Nobody else can own your KiwiSaver account, or a part of it.

But if your heirs wanted to keep the money in KiwiSaver or similar investments, as soon as they got the cash they could put it in their own KiwiSaver accounts or shares or bonds.

If there’s a downturn at the time, it’s true there would be less cash coming out of your KiwiSaver account. It would be a bad time to sell. But your heirs would get the money at a good time to buy into their investments. The two effects cancel one another out.

By contrast, if your KiwiSaver were cashed up in a sharemarket boom, it would be a good time to sell but a bad time to buy. It all comes out in the wash.

If you are keen that your heirs keep the money in KiwiSaver investments until they need it, you could put a letter to that effect with your will — which would at least tell them what you prefer.

On your shares, that’s simpler. Unlike KiwiSaver, the ownership of shares can be transferred to your heirs.

QI remain content with my KiwiSaver choices which continue to suit my circumstances. I experienced the recent rapid descent with interest (observational rather than monetary!).

It caused me to make a small adjustment to my will, because the composition of my estate tilted — something others may find worthwhile thinking about as the “cash value” of their investment dwindles for the time being.

And of course, there’s no guarantee where things will head over the next year or two. I still check daily, but log recent assessments against the healthy net value per annum calculated since the fund began.

Meantime, I’m enjoying the opportunity to help out with grandchildren (who form part of our bubble) during the lockdown — a different kind of wealth.

AIndeed. It’s not all about money. Actually, most of it’s not about money.

But you raise a good point. If people are planning to leave, say, a share portfolio to one heir and a property to another, they may want to keep an eye on the relative values of the two.

And good on you for judging the share market downturn in the context of long-term gains.

QI’m writing in relation to your article last week, “There’s no use crying over a rash KiwiSaver move.” The advice that you provide to this individual is sound, practical and will help to reduce the emotional burden associated with this decision.

Here’s what I felt was lacking:

  • The individual was not encouraged to write to Westpac with a complaint for the poor service received by the financial adviser team. A week is a very long time to wait in the markets. At 67 and nearly retired, access to a financial adviser is critical, especially during an unprecedented, volatile time.
  • Westpac’s advice to their client to complete an independent risk profile exercise at a time when the markets fell 40 per cent is irresponsible.
  • The risk profile exercise the individual completed put him into the conservative or cash fund. Was Westpac’s initial assessment of this individual’s risk profile, as moderate, incorrect?

At the crux, if this individual had the opportunity to speak to a financial adviser, he likely would have made a different decision to hold the moderate fund, rather than switching to the cash fund and later to deposits.

The service this individual received from Westpac was appalling. Please acknowledge this. Westpac’s financial advisers should be held accountable. They should offer better advice and access. Acknowledging this is how the integrity of our financial institutions improve.

AMy priority last week was to comfort the reader and give him some guidance on where to go from here.

But you raise some good points. I put them to Westpac after last week’s correspondent agreed that I could give the bank his name, so they could look into what happened.

My first question was about whether someone should have to wait a week to be in touch with a financial adviser. Westpac says the man visited their Whangarei branch on February 27, where he was encouraged to speak to an adviser. “Our records do not mention a delay to talk to an adviser, but this may have been possible as it was a very busy time for our team. Most delays were of no more than a few days.”

I then asked, on your behalf, whether it’s appropriate to tell someone to use a risk profiler in a volatile market.

Westpac’s reply: “Yes, this tool is a guide to help people understand their attitude to risk and which fund is right for them. It is reliant on customer input to confirm the purpose and timeframe of the investment and the customer’s attitude to investment risk.”

I can’t argue with that. However, it would be good if the tool also stated: “If you find you’re in the wrong fund, seek advice before switching funds.” Moving all your money at once — as last week’s correspondent did — is often not wise.

On your third point, Westpac says it has reviewed the financial advice given to the reader last June, “and we believe it is sound and based on the customer’s goals, timeframe, experience and risk profile.”

In late February, the bank says, the reader completed the risk profiler, which confirmed that he should be in a moderate fund. However, “In March our call records note that the customer used the risk profiler again and it pointed more towards the cash or conservative fund. Given the market decline and volatility, the customer’s responses may have been influenced by what was happening in the market at that time.”

If only the bank had strongly urged our reader at that point to take no steps without advice!

More broadly, Westpac acknowledges recent turbulence has been stressful for some. “As well as endeavouring to talk to as many members as possible, we have also communicated about market volatility through our social media channels, emails to members and our website.

“We are in touch with this customer to offer further financial advice to assist him in making a good investment decision for his long-term needs.”

Beyond the details of this case, the main issue is whether banks and other KiwiSaver providers should support their members better in volatile times.

The Financial Markets Authority appears to be saying so. “We have urged KiwiSaver providers to support their customers through this current period of volatility and uncertainty in the markets. We also recognise that providers will be facing increasing call volumes,” says an FMA spokesperson.

“We have urged firms to give class (general) advice to concerned customers where they are able to, and many are doing this.

“There will be situations where it is necessary to provide a level of advice and support that is closer to personalised advice, to be able to respond to the individual circumstances. We recognise that providers may find it difficult to offer this level of advice to everyone calling them currently. But we do expect them to consider what is the best and most effective way to help each customer at this time.”

My tuppence worth: Banks are hugely dominant as KiwiSaver providers, having picked up members easily from amongst their customers. Maybe they should be hiring more financial advisers.

The FMA adds, “If the customer is not satisfied with the way they have been treated then it is important for them to use the complaints procedure available to them.” If our reader isn’t happy with any further help Westpac gives him, it might be time to contact the Banking Ombudsman Scheme.

QOnce funds have been withdrawn in full — when you’re over 65 — is your KiwiSaver account closed or does it remain open for future investment?

This question was prompted by the statement of a submitter to your column that their plan, after cashing up, was to reinvest in KiwiSaver at a later date.

AYour account is closed once it’s empty. But that’s no big deal. You can open a new account whenever you want to.

QMy wife and I have a large amount of money in a bank account in one of the major banks. The current uncertainty has us worried. We are aware that there is a possibility of a “haircut” if a bank is in trouble, and there is currently no Government guarantee for any money in cash accounts or term deposits.

To safeguard our money, we have recently opened several conservative or cash investment funds at different institutions, like Milford, Simplicity, ASB Bank and Kiwibank, with at this time only small amounts.

Our intention is to transfer our money from the current bank account into these funds if it becomes apparent that the main banks are getting into trouble.

Can the Government or the banks access money in these investment funds under the Open Bank Resolution? Or are the funds safe from Government intervention?

AIt seems counter intuitive, but — if these things worry you — keeping money in a cash fund is arguably safer than in a bank account or term deposit. In a conservative fund, though, the comparison is more complicated.

We’re talking here about cash and conservative Portfolio Investment Entities or PIEs, which are run by banks and other financial institutions. Some are KiwiSaver funds, others are not.

There are several other ways to make our risk comparisons:

  • Volatility of investments. Cash funds are at the lowest risk level, and most hold only bank deposits or similar instruments.

Conservative funds are the next step up the risk ladder. “A conservative fund would almost certainly be riskier than a bank deposit because it may have growth assets, such as domestic and international equities (shares), usually around 20 to 30 per cent,” says an FMA spokesperson. “It may also include properties, commodities, and other assets as well. While this creates the potential for greater return, it also increases the risk of loss.”

However, the bulk of a conservative fund’s investments are still lower risk — cash, bonds and the like.

  • Haircut risk. PIEs, whether or not they are run by banks, are not subject to Open Bank Resolution (OBR), under which depositors in a “distressed” bank could lose a portion of their money. The Reserve Bank confirms this.

However, the bank deposits held by PIEs could suffer an OBR haircut. Cash funds, in particular, hold mainly “haircuttable” assets.

Check whether a fund has most of its investments with one bank, which clearly raises the haircut risk. And don’t assume Bank X’s cash fund holds only Bank X deposits. Some hold investments from a wide range of banks, and their own bank isn’t necessarily dominant.

Note that a non-bank cash fund is just as susceptible to this risk.

Conservative funds tend to hold fewer bank investments, so they are actually less vulnerable to this risk.

You can check a fund’s investments on the Smart Investor or KiwiSaver Fund Finder tools on sorted.org.nz.

  • Provider default — the risk that the company running a cash or conservative fund goes belly up.

“Managed investment schemes (MISs), including cash funds and conservative funds, are not prudentially regulated, but their managers are licensed by the FMA, are regulated for conduct, and are overseen directly by supervisors (who also are licensed by the FMA),” says the spokesperson.

“While there are no minimum capital requirements for funds, MIS managers are required to operate in the best interests of investors, and supervisors are required to do the same.”

The investments made by the funds are held in custody, “so they are not at risk of loss in the event of failure of the MIS manager, supervisor, or custodian,” he says.

If the provider defaults, your investments would be transferred to another provider. And if you didn’t like that provider, you could move elsewhere.

Could this go wrong? Nothing’s impossible, but it seems highly unlikely given the several levels of scrutiny.

  • Bank credit ratings. International agencies assess the likelihood a bank will get into financial trouble, and give it a rating. Ratings are not infallible, but pretty good.

You can check the different banks’ credit ratings on the Bank Financial Strength Dashboard on the Reserve Bank website, www.rbnz.govt.nz. There are three ratings agencies, but broadly, ANZ, ASB, BNZ, Kiwibank and Westpac are rated about equally, with other banks getting lower ratings.

You might also want to keep an eye on the ratings of the main bank investments in your cash or conservative fund. “A cash fund may have the benefit of diversification across multiple banks, but may have lower overall credit ratings than any particular bank,” says the FMA spokesperson.

  • Inflation risk. In a bank deposit or a cash fund, “there is a risk that your money won’t grow as fast as the cost of living (inflation risk),” says the FMA. “If inflation increases more than the returns on your investment, your money will have less buying power when you need it.”

Conservative funds are the winners on this measure. While their share and property values are volatile, over time they grow more than inflation.

  • Inroads made by fees. At first this seems simple. Cash and conservative funds charge fees, but bank deposits don’t.

But the FMA notes, “This can make it more difficult to compare funds with term deposits, as funds are required to advertise returns after fees and tax, whereas term deposits advertise gross (before-tax) returns.”

How are you doing? Too much to get your head around?

Here’s the FMA’s conclusion: “As a general rule: if you are looking to mitigate investment risk, spread your money across different cash investments, including funds and savings accounts. There is an inherent risk in all investments and none is government guaranteed, whether it’s bank deposits or cash funds.”

What it all boils down to is good old diversification — the investor’s friend.

Footnote: Accessibility might matter to you. With non-KiwiSaver cash and conservative funds you can usually access your money in a few days, whereas term deposits are tied up.

However, if you are over 65 or you don’t expect to spend the money until you reach NZ Super age, I suggest you favour KiwiSaver funds over other funds. The fees are sometimes lower, and the funds are probably watched more closely. Note that over 65s can now join KiwiSaver at any time.

Don’t Panic

The letter above concerns me, as do several other readers’ letters about what investments would be affected by OBR. We’ll look at this more next week. But please, everyone, stop panicking about the health of New Zealand banks.

Says a Reserve Bank spokesperson: “New Zealand’s financial system is sound, with strong capital and liquidity buffers. The Reserve Bank has been in constant communication with the country’s retail banks and the New Zealand Bankers’ Association, and we are confident that they are well placed to respond to the impacts of coronavirus.

“We are continuing to monitor developments and we’re ready to act to ensure markets, financial institutions, and the financial system operate in a stable and efficient manner. We encourage those who are financially affected by COVID-19, particularly small to medium sized businesses, to contact their bank to discuss their situation.”

QI am a 34 year old male, and I have been in KiwiSaver for about 12 years. I’m looking to buy my first house in the next five to ten years. I have a balance of around $60,000. My current provider is one of the banks.

I have been talking with another provider who obviously wants me to join with them. They have told me their great annual return figures, which are better than the banks’ returns (ranked number two out of 35 providers etc).

What are the implications and risks of going with another provider? What happens if this company were to go bust while I had my money with them? What are the things to consider and be wary of when selecting a KiwiSaver provider?

APlease don’t be attracted by good returns in the past. They don’t really tell us anything about how a provider will do in the future.

A while back I was looking at KiwiSaver returns. There were 11 conservative funds that had been around for at least ten years. The best performer over one year came tenth out of 11 over ten years. Meanwhile, of the four aggressive funds, the best one-year performer was the worst ten-year performer. Return rankings are all over the place.

On the safety of KiwiSaver providers, see the “provider default” section in the Q&A above. There’s plenty of monitoring. While there are no guarantees, let’s put it this way: I’m happy to invest with a smaller KiwiSaver provider.

The best way to choose a provider is to find one with low fees and good services to investors. The KiwiSaver Fund Finder will help you with both.

Before you do anything else, though, use the Fund Finder to check that you’re in the right type of fund for you.

Message to Mothers

Last September I published a message to fathers near Father’s Day. I said then that I would send the same message to Mums as their day approaches — next Sunday May 10.

The world has changed a lot since then, with limitations on shopping. But still, I bet there’s some silly Mother’s Day purchasing going on.

So the question for mothers is: do your family members need to “prove” their love by spending heaps on you?

How about talking with the family about how you would like to celebrate Mother’s Day in a way that doesn’t cost much? If your children no longer live with you, perhaps a phone call from them is all that’s needed.

I don’t like meanness, but giving doesn’t have to have a price tag attached. I’m so sick of hearing about people with big unnecessary credit card debts — often run up on gifts the recipient doesn’t even like. And in this time of uncertainty, big spending makes even less sense.

Let’s do a Low-Money Mother’s Day this year.

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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.