NZ Herald 20 September 2008

AI’m afraid you’ve waited for more than two months. I get far more letters than I can respond to, but given your apparent feeling that I have misled you, I feel compelled to reply.

It seems you have been an on-and-off reader of this column. Among points I have made many times are the following:

• I’m not a champion of KiwiSaver. It probably costs too much for what it achieves. I have also criticised many aspects of it. And there have been teething problems.

  However, from the individual’s point of view, it’s hard to beat it as a place to save, because of government and — in many cases — employer contributions. And yes, people over 50 get a particularly good deal.

• I’ve never advocated putting 8 per cent of pay into the scheme, unless you want to tie up money that you would otherwise fritter away. For self-disciplined people, 4 per cent is better, giving you all the KiwiSaver advantages. Make further savings elsewhere, where the money is accessible.
• With any investment that includes shares or property, your balance will go down sometimes — something I must have written about scores of times over the years. But hang about, and it will rise again.

  As it turned out, the first year of KiwiSaver was a bad one, and your account’s performance reflects that.

Despite that, though, you’ve actually done really well. What’s relevant is what has happened to the money you’ve put in — which is the way you would judge any other investment.

I’m having a bit of trouble reconciling your numbers, but it seems you’ve contributed $4513, which has grown to $5270, a gain of close to 17 per cent. What are you griping about? And you can expect even faster growth once your employer contributions are included.

Still, market returns do matter, especially over the long term. On average, we would expect returns on your KiwiSaver account to be higher than on your term investment — even before taking into account government and employer contributions — because you are taking more risk. But the returns will also be more volatile.

That brings me to another point I’ve often made — but apparently not when you were reading the column. If you can’t tolerate volatility, or you are planning to spend the money in less than about ten years, don’t invest in riskier assets. You have half your money in funds with considerable holdings in shares and property.

Given your attitude, I suggest you transfer all your KiwiSaver money to ASB’s conservative and cash funds. The transfer should be simple and free. You’ll probably end up with less in retirement, but your ride will be smoother. You might also want to reduce your contributions to 4 per cent, which you can do any time.

On mortgage diversion, I understand your disappointment. I’m disappointed, too, that mortgage lenders and the government have taken this long to make the system work well. Still, the person you spoke to was way too pessimistic. Mortgage diversion is already available to some KiwiSavers, and should be available to many more soon. See the next Q&A.

What about what National might do to KiwiSaver if it wins the election? It could make the scheme less attractive, although with close to a million people already signed up and many more still planning to, it’s hard to imagine National rocking that boat too much.

In any case, as you say, you always have the option of taking a contributions holiday. Bill English has promised that National won’t take away the right to do that.

All you have to do is fill out the form at www.kiwisaver.govt.nz. Click on “KiwiSaver forms and services”. But don’t rush into that. I can’t think where else you will get a 17 per cent return — even before adding employer contributions — in a downturn year.

There now! How am I doing on the redemption front?

AGreat news this week from the government, which has changed the rules so that the majority — and probably the vast majority — of KiwiSavers with mortgages will be able to divert up to half their contributions to pay off the loans.

Once you’ve been in KiwiSaver for 12 months, you can use mortgage diversion, which applies to the mortgage on your own home.

As explained in this column, it’s an excellent idea for all KiwiSaver employees earning more than $26,075. For employees earning less, the numbers are a bit complicated, but broadly they work out as follows: if you are over 55, skip mortgage diversion, and if you are under 35, use it.

If you are in between, use mortgage diversion if you are a conservative investor.

Mortgage diversion makes no sense for non-employees with mortgages. They should simply contribute up to $20 a week to KiwiSaver and put the rest towards mortgage repayment.

Until now, no provider could offer mortgage diversion if your loan was partly revolving credit, or in some other circumstances. This was to prevent people from diverting money and then accessing it straight away, to spend it.

Under the new rules, you can use mortgage diversion provided the diverted money is used to reduce your loan in such a way that the money can’t be immediately withdrawn, says an Inland Revenue spokesman.

You would still be able to apply later to add to your mortgage, which could in effect free up the money you have diverted. However, some mortgage lenders may not allow that. And I suggest you don’t plan to do it anyway. Reducing your mortgage is surely a good tactic in these iffy financial times.

The KiwiSaver Act permits you to put diverted money towards either reducing your regular mortgage payments or paying extra off the loan. When I surveyed the major mortgage lenders for my new “KiwiSaver Max” book, all but BNZ said they would permit the latter but not the former, although some were considering changing that. BNZ had not yet decided its policy.

The Bankers Association said this week it is pleased with the government’s changes, and many of its members are planning to make mortgage diversion available to a much wider range of customers.

The changes take effect on October 16. I suggest that KiwiSaver employees contact their mortgage lender in the meantime, to see if and when they will be eligible to use mortgage diversion. If your mortgage is not suitable, it might be possible to change it.

On the provider front, the following told me, in a survey for my book, that they are offering mortgage diversion and won’t charge a fee: AXA, Civic Assurance, Fisher Funds, Grosvenor, Huljich, Legal & Professional, Smartshares, Southland Building Society and SuperLife.

The following they may charge a fee: ABN AMRO Craigs, AMP, ANZ, Aon, ASB Group Investments, Asteron, eo, ING, IRIS, Medical Assurance Society, The National Bank, Staples Rodway, Tower, and Westpac.

The following will charge a fee: Fidelity and NZ Credit Unions- one-off $25; Kiwibank and Mercer — intend to charge one-off $25; NZ Anglican Church — $25 set-up and $24 a year.

First NZ Capital and Gareth Morgan were not planning to offer mortgage diversion. Brook Asset Management said it is thinking about it.