NZ Herald 21 October 2023

AGosh, you make me sound like a bossy old school marm. But you’re not as naughty as you fear!

There’s nothing inherently wrong with what you’ve been doing. The main point is that you’ve been in KiwiSaver for years — getting the government and possibly employer contributions. Good on you.

And maybe you started in a conservative fund because you didn’t know much about investing, and would have panicked if you were in a higher-risk fund and your balance fell. Staying in a conservative fund is way better than moving your money from one risk level to another whenever the markets get volatile, and making paper losses real in the process. A hands-off — some would say lazy — approach is way better.

Still, it’s spring-cleaning time. And in KiwiSaver that means checking if you could do better in a different fund. Yes, you could.

The first step is to understand that, as you get within about ten years of retirement — and you’re near enough to that — it’s often a good idea to put your KiwiSaver money into more than one fund with the same provider. As far as I know, Simplicity is the only provider that doesn’t allow this.

Next, two important questions to ask yourself:

• When are you likely to spend your KiwiSaver money?

  You might, for example, expect to spend some of it between 65 and 70, perhaps to pay off a mortgage or upgrade a house or car, or just for general living costs.

  If so, you could move that portion of your savings into a balanced fund, which would be a bit more volatile than where you are now but will probably have higher returns. Then, when you get within about three years of spending, move that money into a lowest-risk defensive fund. That will prevent the balance from dropping right before you want to withdraw.

• Could you cope with seeing your balance fall a lot — say from $100,000 to $70,000 — knowing it will recover, but it might take a year or two or even longer?

  It’s pretty unusual for any KiwiSaver account balance to drop that much. But it could happen occasionally if you put the rest of your money — what you expect to spend after you’re 70ish — in a higher-risk aggressive or growth fund. Gulp!

  On the other hand, in most years these funds grow more than lower-risk ones, and over the long term your balance will almost certainly be bigger.

  Are you up for it? Can you promise yourself you will stay put through thick and thin? If so, move up the risk ladder with your longer-term savings, while remembering to move some money back down to a balanced fund when you are within about ten years of spending it, and down again to a defensive fund when you have about three years to go before spending.

If a higher-risk fund sounds too scary, modify the plan by moving all your money into a balanced fund. Then gradually reduce the risk with portions of the money when you expect to spend it fairly soon, as described above.

Okay, now to the other issue: which provider?

It’s not clever to choose one that has performed well recently. Often they do badly in the next period. On the other hand, providers that charge low fees almost always keep charging low fees. So that’s a good basis for a choice.

Let’s say you’re wanting to choose a balanced fund. Go to the Smart Investor tool on sorted.org.nz and sort the balanced KiwiSaver funds by “fees (lowest first)”. Then read about the first few funds on the list and select one. Don’t agonize over your choice, as your “finalists” will probably perform fairly similarly.

You may also want to consider the ethics of the finalists. Go to the Mindful Money website for information on different providers and funds.

Once you’ve made your choice, you just need to contact the new provider and they will move your money for you.

AFunnily enough, moving to a higher-risk fund when the share market has performed badly is not such a bad move. You’ll be buying more shares when their prices are low.

But, as you acknowledge, switching funds because of market movements is not a wise strategy. However, it’s fine to switch because you realise you can take on more risk — or you realise you need to reduce risk because you will spend the money soon.

So yes, increasing your risk is a good idea. You’ll probably end up with more, as long as you will stick with your investment when your balance falls.

I suggest moving your money gradually, so you don’t switch the lot at what turns out to be a bad time. Perhaps move one third now, another third in a month and the rest in two months.

AThanks for another interesting suggestion.

Last week’s correspondent sent me a P.S., which reads: “My friends are also catching on to this great way to send our folks off personally. A great joining, family therapeutic exercise. Grandchildren also get involved, so dispelling the fear of the event. Other cultures do it so well.”

Food for thought.

AClever, but would it work? I asked Donald Webster of Websterlaw.

“The $15,000 is the maximum amount any one bank or financial institution can release back to an estate without the need to obtain probate. Also, probate is needed in any event where the deceased owns public company shares or property,” he says. “It is not illegal to spread the money around, so the balances are below that limit.”

Is there’s a way around the problem of you dying before your mother?

Referring to you, Webster says, “She could do a will which refers to the specific account she has set up for her mother and how it is to be distributed, as in accordance with what her mother had in her will. But her executors will have to get probate in her own estate first.”

Webster also has another idea. “She could open a joint account with her mother, which would mean that if she survives her mother, the bank will change the account to being just in her name. While that money is technically hers, she would still have obligations back to the beneficiaries of her mother’s estate.”

Okay, but is the basic idea good?

“A qualified yes to this. Holding money in trust creates a ‘fiduciary relationship’, which comes with legal obligations. Provided the other beneficiaries in the family are fully involved in the changes, then I see no problem, but the risk of fraud is still there. I would not recommend it.”

He adds, “The cost of obtaining probate on its own is not very high in a simple application. It is the administration of the estate that costs time and therefore money. And any disputes accelerate the costs markedly.”

Sounds as if the plan might cause more complications than it avoids.

While we’re discussing probate, another lawyer tells me the NZ Law Society has raised concerns with the Ministry of Justice and the High Court about increased delays to the granting of probate.

“The High Court advises that the current process time is now 12 weeks and acknowledges the impacts of this on solicitors and bereaved families. The Law Society is actively engaging with the Ministry of Justice on ways to reduce this backlog and ensure efficient process,” says the Society.

That’s good news.

AThanks for this. It’s great to know the process has been sped up so much.

Inland Revenue confirms that what you say is correct.

AGood question. It’s to do with tax.

Employee contributions come out of your after-tax pay — your total pay minus PAYE and ACC. But they are calculated as 3 per cent of your before-tax pay. So if you earn $100,000, your contributions will total $3,000 a year.

Employer contributions are also based on your gross pay, but are then taxed at the ESCT — employer superannuation contributions tax.- rate before the money goes into your fund. This ranges from 10.5 per cent for those on incomes up to $16,800, to 39 per cent for those earning more than $216,001. (These are slightly gentler rates than on ordinary income.)

So your employer contribution is smaller than your employee contribution, by the amount of the ESCT tax.

If all of this is too hard to follow, just remember that it’s really good for everyone aged 18 to 65 to be in KiwiSaver, because the government contribution — up to $521 a year — boosts your total contributions. It is not taxed.

And it’s even better for employees. In most cases you get an extra 3 per cent of your pay from your employer, even though it’s taxed.

As far as your own contributions are concerned, whether you are an employee or not, and whether you put the money in via your employer or directly to your KiwiSaver provider, you are paying it out of money that has been taxed.