This article was published on 26 November 2016. Some information may be out of date.

Q&As

  • Better to put savings towards mortgage than emergency fund
  • How to weigh up KiwiSaver versus other saving
  • Reader not stuck with KiwiSaver provider, but costly to move
  • Reactions vary on discussion about which indexes to use

QI’m 35 and have a 10-month-old child. My husband has terminal cancer and is not expected to make it past another two years.

I live in Auckland and have a large mortgage on my house with no other debt. I can cover the mortgage plus expenses with my salary and have about $88 left over a week.

I already have a small $1000 emergency fund. Where should I put this little bit of savings? Should I expand my emergency fund, leave it in a savings account, put a little bit extra on my mortgage, save for a term deposit?

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.

QI would like to know whether it is best to save in a savings scheme or to pay extra money into my KiwiSaver account?

Recently several employees went crazy by doubling their KiwiSaver contributions to 8 per cent! They feel proud of what they are doing, but somehow I feel there must be a better savings alternative?

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.

QIn early 2014 I transferred a small UK pension of about $NZ 7,500 to my KiwiSaver. This was pension contributions while on my OE in the early 90s.

Recently I applied to change my KiwiSaver provider but found I could not do so as KiwiSaver funds are no longer QROPs registered. This means I am now trapped with my provider. I could easily have transferred the UK pension to my other pension fund but chose KiwiSaver as it was performing better at the time.

What is being done for people in my situation? I did this to avoid being taxed on transfers from the UK after 1st April 2014. I am a 50-year-old woman (recently separated) earning a slightly above average wage and won’t always want to be in my high growth aggressive fund. Luckily my fund is doing okay (for now), but it might not in the future. And what about others who might be trapped in a poorly performing fund?

Is the Government doing anything to help people in my situation? If I could transfer it to my other fund at NZ Retirement Trust all would be well.

One of our KiwiSaver “rights” is changing providers whenever we want, but that has now been taken away from me and I presume many others as well. Any comments or information would be appreciated.

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.

QThank you for discussing the different aspects of comparing the returns of active share funds to the indexes last week. Very educating!

I think it would also be worth considering mentioning John C. Bogle and his books about index funds. With over 40 years of experience and with $US 3.6 trillion under management, I’d wager that he is an authority on the subject.

Keep this type of discussion coming!

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.

Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd FSCL, a seminar presenter and a bestselling author on personal finance. 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.