NZ Herald 26 November 2016

AGosh, a tough situation for you. Well done for putting some thought into your finances at a time when I’m sure you have lots of other things to think about.

Out of your four options, I think the emergency fund and paying down the mortgage are the best two.

Just looking at the numbers, you’ll do best by reducing the mortgage. Let’s say your loan is $400,000 at 5.5 per cent for 30 years. If you add $88 a week to your repayments, you’ll shorten the loan to about 22 years and save about $130,000 in total interest paid. That’s big money.

You can do the calculations for your actual situation on an online mortgage calculator. Your results will show that your “little bit of savings” can go a long way.

Put another way, if your mortgage interest rate is 5.5 per cent, paying extra off the loan is the same as earning 5.5 per cent interest on that money, after fees and taxes. You can’t get anything like that in an emergency bank account.

One concern is that you might want access to the money if something unexpected arises. Ask your mortgage lender if you would be able to take the extra payments out again if you needed the money. I expect many lenders would permit that. Get it in writing.

I hope things go as well as possible for you all.

AThere are three questions to ask yourself here:

• Are you contributing at least $1043 a year to KiwiSaver, so you get the maximum tax credit? If you earn more than $34,762 a year and contribute 3 per cent or more, you can tick this one. If not, it’s great to put extra into KiwiSaver.
• Are you likely to raid non-KiwiSaver savings for spending money? If so, you’ll be better off in retirement if you lock up your money in KiwiSaver. But if you’re disciplined with your savings you may prefer to have the money more accessible, in case you need it for an emergency. And I mean a real emergency. You need to know the difference between an I-must-have-those-shoes emergency and a family-member-needs-support emergency.
• Are you likely to get as high a return in your non-KiwiSaver savings? If you put it in bank term deposits, you probably won’t. But if you invest it wisely, you could do as well or even better than in KiwiSaver, given that your extra savings aren’t boosted by employer and government contributions.

If you decide to save outside KiwiSaver and you’re happy with your KiwiSaver provider and fund, ask the provider if they also offer another similar non-KiwiSaver fund. That might be a good option.

AIt seems you’ve been given the wrong information — maybe by a provider that didn’t want to lose you! You haven’t lost the right to change providers. It’s just that if you do you will have to pay a UK penalty charge.

“Where a person has already transferred their UK pension into a KiwiSaver scheme, they are still legally able to transfer to another KiwiSaver scheme, but the amount that relates to their UK pension may be subject to a UK penalty charge of up to 55 per cent, as a result of all KiwiSaver schemes no longer achieving QROPS (Qualifying Recognised Overseas Pension Scheme) status,” says an Inland Revenue spokesman.

“This penalty charge is a feature of the UK’s pension rules and their QROPS regime, and is not something Inland Revenue has any control over.”

He adds though that, “Inland Revenue is continuing to work with the UK Revenue office and the Ministry of Business, Innovation and Employment to find a solution to this issue.”

In the meantime, you can still transfer your money to a different fund — perhaps a lower risk one — offered by the same provider without paying the UK penalty.

The situation arises from a 2015 change in UK rules. “The new rules meant that all KiwiSaver schemes that previously had achieved QROPS status no longer met the new criteria,” says the spokesman.

“This is because, to qualify as a QROPS, members’ funds must remain locked in until at least the age of 55, with early withdrawal permitted only in cases of serious illness. While KiwiSaver members’ funds are locked in until the age of 65, there are a number of permitted early withdrawals which mean that KiwiSaver schemes don’t satisfy the QROPS requirements; for example, withdrawals for the purchase of a first home and in financial hardship situations.”

I wouldn’t hold my breath waiting for the UK to change its mind. People who have left that country and taken their pension money with them are probably not a top priority for UK officials.

If you really want to switch providers, you can always take it on the chin and pay a few thousand dollars. If you have substantial other KiwiSaver savings and you move from a high-fee to a low-fee provider, the lower fees from now on might more than make up for the penalty.

ANot everyone was as pleased with last week’s Q&A as you were. One reader, an authorized financial adviser, said, “The harsh reality is that regardless of which index active managers use for comparison purposes, the NZX 50 index is what most investors look for as a benchmark when investing in NZ shares.”

He went on to say, “Many active managers in NZ have outperformed the generally accepted benchmark (the NZX50) over the medium to longer term and therefore have added value to clients’ portfolios.”

I agree that the NZX50 is often used for comparisons. It’s probably largely because historically it has been used to measure the performance of the whole market. I’ve criticized this for years, because the index is weighted towards the biggest companies and doesn’t represent the smaller — higher risk and higher return — end of the market.

That’s why I’m trying to educate investors out of using that index for comparisons. It distorts what’s happening.

It’s like someone proudly comparing his bond portfolio — that includes bonds with low or no credit ratings but high interest rates — with a bond index that covers only the lower-risk, lower-interest end of the market.

Surely a financial adviser would agree that it’s important to take risk into account when assessing an investment.

This is not something I have dreamt up. Many unbiased experts — academics and others not in the industry — have long raised questions about comparisons with the wrong index.

And it’s a worldwide issue. In a new report, the UK’s Financial Conduct Authority says “performance is not always reported against an appropriate benchmark.” The FCA is proposing steps to remedy this.

In New Zealand, new regulations require funds to compare their performance with an appropriate index from December 1. I hope this leads to fairer comparisons.

And John Bogle, for those who don’t know, is the founder and retired CEO of Vanguard, a huge US-based company that runs mainly index funds. Bogle’s writings, in books and articles, are well worth reading.