NZ Herald 20 May 2023

AIt seems tough that you would be “punished” for saving more. But I can imagine it could happen. So, if I were you, I would make the extra savings outside the work environment.

It will make no difference taxwise.

The best way to do this is to set up an automatic transfer from your bank account to your KiwiSaver account, the day after you get paid — just to make sure the money is in there.

Not only does it keep your boss out of it, but it’s easier for you to change the amount if you need to at some point. And, by the way, that change could be upwards or downwards. While the amount your employer can deduct from your pay must be 3, 4, 6, 8 or 10 per cent of your pre-tax pay, you can deposit any amount directly to your provider. That can include lump sums or regular contributions.

But hang on a minute. Your last sentence makes an important point. You can set up similar regular contributions to a non-KiwiSaver fund.

The advantage, as you say, is you can withdraw any or all of the money whenever you need to. While KiwiSaver withdrawals are permitted if you are in dire financial straits, with a non-KiwiSaver fund you can also take money out if, say, a family member is in trouble, you want to invest in your own or a relative’s new business, or you decide to move to a more expensive home.

Note, though, that if you’re a big shopper who might fritter away savings on unnecessary stuff, you might be better to lock the money away in KiwiSaver.

One more point: I’m assuming you have no debt. If you owe money on a credit card or for a car or something, repaying that should be a top priority.

What about if you have a mortgage? A year or two ago, when home loan interest rates were unusually low, it was debatable whether making extra mortgage payments was the best use of your savings.

But now that those rates have risen considerably, we’re back to the “business as usual” situation. So I think, it’s better to reduce your mortgage, when you can do it without penalty, than make extra savings.

AI knew that many credit cards were charging around 20 per cent interest, and more for cash advances. But I didn’t realise some are up near 30 per cent — although I suppose it’s not surprising given recent big rate rises on mortgages and so on.

If you owe $1,000 and don’t repay it, at 27.89 per cent the compounded interest over a year will total $317 — almost one third of the $1,000. If you don’t repay it over three years, the debt will more than double.

Please, readers, don’t borrow for anything other than buying a home if you can possibly help it. If you save first and then buy, over a lifetime you will end up way better off.

Meanwhile, our correspondent is clearly one of the clever credit card users, paying off his credit card debt as late as possible without interest charges, while earning interest on the money in the meantime.

This has become more worthwhile again, now that savings account interest is higher. And it’s particularly worthwhile if you have up to six months interest-free — just as long as you remember to pay in time.

I have to add that it’s no wonder people like you — the credit card winners — can get such a good deal, when the credit card losers are paying such high interest. In a way, they pay for your good fortune.

AI wouldn’t do that. Since you wrote — a few weeks back now — the results for KiwiSaver funds for the first three months of this year are out.

And, as noted last week, Morningstar reports that no mainstream KiwiSaver fund reported losses in that period. Only a few small KiwiSaver funds — mainly in fixed interest, property or sectors of the share market — lost ground.

Your provider, Simplicity, actually had a particularly good quarter. It had the top performing conservative fund, and came second amongst the default funds, non-default conservative funds and growth funds.

Nobody knows where the markets will go from here. But the point is that managed fund returns wobble around.

Most lost ground in the early 2020 Covid downturn but then regained it unusually fast. Since then, there has been a more sustained downturn. But over the long run, KiwiSaver and other managed funds nearly always perform better than bank deposits. And the higher-risk the fund, the bigger that difference.

Meantime, bank term deposit returns have been unusually high lately. But I wouldn’t count on those rates staying at that level for long.

I’m hoping your KiwiSaver money — and particularly any in the growth fund — is for spending some years down the track. If so, I suggest you leave it where it is.

However, if you expect to spend that money within the next ten years, I would move it gradually to a middle and then lower-risk fund, and finally — within about three years of spending — to a cash fund or term deposits.

Note to another reader with a similar question, who has about $2 million in managed funds: My suggestion is the same. But if you would be happier in bank term deposits, you have enough savings that even in those investments you should be able to withdraw a good monthly income for the rest of your lives.

Your children will probably inherit less, though.

AI would ignore the fact that one manager has performed better over a short period. In the next year or two, the other might do better. Big swings in performance happen all the time.

For example, Simplicity’s top-performing conservative KiwiSaver fund mentioned above was the worst performing fund in that category over the last year and three years, according to Morningstar data.

I suggest you take the money from both provider’s conservative funds. If you need more, withdraw from both balanced funds.

The performance of these lower-risk funds has been unusually poor in the last year or so, because of rapidly rising interest rates — as I’ve explained before. But they will almost certainly be recovering now.

For the future, you might want to set up your investments as explained above.

ALast week I wrote that there is only one provider I know of, SuperLife, that enables KiwiSaver members over 65 to have the dividends earned by their funds paid directly to them. SuperLife also offers this service in some of its non-KiwiSaver funds.

I asked other providers who also do this — in or out of KiwiSaver — to let me know. Hence the replies above.

Devon doesn’t offer KiwiSaver funds. Kernel does, but it doesn’t offer dividend payments to over 65s from those funds — although it does in its identical non-KiwiSaver funds. “So, if someone wanted dividends, they could switch from the KiwiSaver to a general investing fund and get distributions paid out,” says Anderson.

Whether or not you are in KiwiSaver, if you are over 65 and invest in a managed fund that receives dividends — in other words, it includes shares in its investments — it can work well to have those dividends paid into your bank account or cash fund.

It’s a good way of moving money to a lower-risk investment when you are within about three years of spending it. Dividends are already in cash, so moving just dividend money — as opposed to money invested in shares — into a spending account makes sense.

A Reader’s Story

Since mid April, to mark the 25^th anniversary of this column, we have run some readers’ stories of how the column has helped them over the years. Here’s another.

AWell done. And you are probably finding now that your non-KiwiSaver fund has turned the corner.