NZ Herald 28 March 2015

AWhy am I not surprised that someone who did that well with a business in high school is now checking out all the tax and loan possibilities?

But I’m afraid the word from Inland Revenue isn’t favourable. “You can’t deduct expenses which are of a private nature, and this includes tertiary study fees and expenses, regardless of whether you’re in a business or not,” says a spokesman.

However, “A borrower who is running a business is not precluded from obtaining a student loan,” he says.

There is, of course, the question of whether someone as well off as your son should be getting an interest-free student loan, at taxpayer expense. But I suppose it’s not too different from rich people receiving NZ Super. If the government offers it, and you’re eligible, why not?

ASigh. If we were to start all over again with KiwiSaver, one of the first things I would push for is the same simple fee structure for every provider. They could vary their fee levels, but not the way they calculate their fees.

The current set-up makes fee comparisons tricky. Your research is a case in point.

Let’s start with what I said last week. I referred to Canstar’s KiwiSaver comparison, at tinyurl.com/canstarkiwisaver. It lists annual member fees, which are a fixed amount, and total published fees, which are a percentage of your account balance.

I said that for children with low account balances, total fees are likely to be lower if you go with one of the few providers that don’t charge a fixed member fee. They include Kiwi Wealth and Smartshares.

However, a footnote on Canstar’s website says, “Total published fees displayed includes the management fee, admin fee and trustee fee as a % of $7,500 balance as of 24 July 2014. Additional fees/tiers may apply.”

And it turns out that both Kiwi Wealth and Smartshares charge differently for accounts with balances different from $7,500. I should have checked that last week. Apologies. I’ve now done so.

Says a spokesperson for Kiwi Wealth, “Our minimum fee is not a fixed fee in disguise. It is an either/or scenario. The minimum fee only applies when a member balance is below a certain threshold.

“For example, a member balance of $2000 would be subject to a $50 fee per year only ($40 if they are in the Default investment portfolio). A member balance of $5200 would be charged a percentage fee instead, as they have reached the balance threshold for the percentage fee to kick in (approximately 1 per cent of their balance equals $52 per year).

“It’s important to note that this fee is an all-inclusive fee — there are no other fees charged for performance or administration as is common with other providers. With other schemes, the fixed fee always applies.”

At Smartshares it’s similar. If your balance is below $4500, they charge $40 a year and no percentage fee. At $4500 to $30,000 they charge 0.85 per cent and no fixed fee. And at $30,000-plus they charge 0.65 per cent and no fixed fee.

What all this amounts to is that Kiwi Wealth and Smartshares are still reasonably good propositions for children or others with KiwiSaver account balances of $1000 to a few thousand dollars.

Their fees will be higher than providers that charge a low fixed fee — say $23 to $35 a year — plus a low percentage fee. But obviously they will be lower than anyone that charges a fixed fee of $40 or more plus a percentage fee.

Meanwhile, SuperLife’s myFutureFund does look like a good option.

In last week’s column I said it’s good to sign up a child in KiwiSaver. But, “because of the limitations on how the money can be used, you might prefer to make your monthly $50 contributions somewhere else. Ask the children’s provider if they offer a similar non-KiwiSaver fund, from which money can be easily withdrawn.”

The SuperLife product is an example of such an offering. At $33 a year, SuperLife’s KiwiSaver fixed fee isn’t the lowest, but it’s among the low ones. And their percentage fees are also low. What’s more, as you say, if you also sign up the child for myFutureFund they pay no fixed fee for that. So the total fees for the two accounts could well be the lowest available.

I’m not aware of any other provider that offers a fee deal like that. Providers — please let me know if you do.

AOf course low fees aren’t as important as returns after fees and taxes — which directly affect how fast your KiwiSaver account will grow.

The only trouble is that we can’t predict future returns. This is not a peanuts and monkeys situation. High fees don’t necessarily bring in high returns. In fact, there’s no good way to say which funds will do well.

Heaps of research shows us that looking at past returns is not a good guide. Sometimes the funds with the highest past returns — which are often the riskiest funds — have the lowest future returns.

Because of this, I suggest you don’t dwell on past returns — beyond moving out of funds that have consistently performed really badly. It’s better to choose a fund with low fees, which has got just as good a chance of performing well as one with high fees. And, after fees, chances are it will perform better.

So let’s look at your two funds on the KiwiSaver Fund Finder on www.sorted.org.nz. That tells us that your Forsyth Barr growth fund charges 2 per cent on an average KiwiSaver balance, while your Kiwi Wealth fund charges 1.14 per cent.

This considerable difference will help explain the 10 per cent difference you’ve seen in the two funds’ performances.

But returns have also been better in the Kiwi Wealth fund — at an annual 8.64 per cent since April 2009. That’s below the growth fund average of 9.72 per cent, but well ahead of Forsyth Barr’s 6.46 per cent.

Does that mean the Kiwi Wealth fund managers are better investors? Maybe. But the Fund Finder tells us the two funds have quite different types of investments. The Forsyth Barr mix is 70 per cent shares, 15 per cent bonds, 13 per cent property and 2 per cent cash. The Kiwi Wealth fund is more heavily into shares, at 85 per cent, and also has 11 per cent in cash and 4 per cent in other investments.

If in future shares and cash perform worse than bonds and property, the relative performance of the two funds might reverse. Still, the fee difference could cancel out Forsyth Barr’s advantage.

Convinced to concentrate on fees? I hope so — in which case you might want to check out fees on all growth funds in the Fund Finder. ASB charges the lowest fees, with ANZ and SuperLife not much higher. And the last two have considerably higher scores than ASB for services.

I suggest you read more about each of those funds in the Fund Finder and consider switching both your accounts to the provider that appeals most.

AThere’s a lot to be said for giving or lending to adult children when they need the money, rather than bequeathing money they will — hopefully! — receive much later in their lives.

I also like your use of automatic loan repayments. Who needs the stress of chasing up a slow payer?

And the grandkids’ trips are a lovely idea, which you probably enjoy as much as they do.