NZ Herald 29 July 2017

AI was once sailing in a smallish yacht through the narrow stretch of a harbour. The sails were full and we seemed to be going full-steam — sorry, full-sail — ahead. It felt great. But when we looked at the shoreline we realised we were actually going backwards.

The force of the tide was stronger than the force of the wind.

Some time later, the wind had dropped and the tide had changed. The sailing wasn’t nearly as exhilarating, but we were getting where we wanted to go.

Investing in bank term deposits in the late 1960s to early 1980s was like the first experience. It felt wonderful to earn interest well into the teens. Your savings balance zoomed up.

The only trouble was — as our graph shows — inflation was even higher than interest rates.

Your $1000 term deposit might be $1120 a year later, but you could buy less with the $1120 than you could with the $1000 the year before. You were sailing backwards.

These days, your $1000 might be just $1030 a year later — at an interest rate of 3 per cent. But with inflation at just 1.7 per cent, your buying power is growing. Your yacht is making progress.

And that’s all that matters with money. As anyone who has used a foreign currency when travelling knows, it’s not about the numbers, but what you can buy with your cash.

Let’s add tax into the mix. In the bad old days, after paying lots of tax on your interest you were even further behind. These days, you can still come out ahead after tax.

There’s a good argument — and I’ve made it before — for adjusting tax brackets to match inflation, so that we don’t pay higher tax just because our incomes have grown with inflation. But while “bracket creep” should stop, it isn’t nearly as bad as it was in the 70s and 80s.

Sorry, but I can’t see why we should stop taxing term deposit interest altogether, while continuing to tax other forms of income.

All in all, term deposits are not too bad a deal these days, especially if you do the following:

• Shop around. That’s easy on websites such as www.interest.co.nz. It shows, for example, that several banks are offering more than 3 per cent for 12 months on $5000, and more than 4 per cent for five years on $5000.
• Go to your own bank and ask if they can raise their rate for you. Several people have said that worked for them.
• Consider similar alternatives with somewhat higher average returns. Bank-run PIE term funds give many people a tax break. With cash managed funds — run by KiwiSaver providers and others — your money isn’t tied up. But your return will vary — which might be good or bad — and you’ll pay fees.

On your question about future interest rates, nobody knows. Many say rates will rise — given they are low by historical standards. But other experts say conditions have changed, and rates may stay lower from now on.

In light of that, it’s a good idea to have some deposits maturing soon and some further down the track.

ATotal remuneration, as it’s sometimes called, is certainly legal. It was banned by the Labour government in mid-2008, but allowed again by National after it won the election that year.

Some people agree with your bosses, that total remuneration is fairer to those who don’t join KiwiSaver. Others take your view, that employers are meant to be incentivising people to join. And I tend to be on your side.

But there’s not a lot you can do about it — except perhaps say when negotiating a pay rise: “You’re saving by not contributing to KiwiSaver, so how about giving me more money in my hand?”

If you think you’re contributing too much, you could reduce your contributions to 3 per cent plus 3 per cent. Ask your employer to adjust it.

AYour goal is presumably to reach retirement with a mortgage-free home and a big chunk of savings.

It’s wise for everyone with a mortgage to ask your question: Is it better to contribute to KiwiSaver while paying down the mortgage, or skip KiwiSaver and put as much as possible into getting rid of the loan first?

Unfortunately, the answer depends on the assumptions you make about future mortgage interest rates, KiwiSaver returns, and so on — things we can only estimate.

Generally, employees whose employers pay their KiwiSaver contributions are likely to be better off in the scheme and contributing 3 per cent — to get their maximum tax credits and employer contributions. Any further savings should go into mortgage payments.

But it’s a harder choice for you, without employer contributions.

You suggest the possibility of putting in just $1043 a year, to get the maximum $521 tax credit. But you won’t be able to do that in the first year. As an employee, you must contribute at least 3 per cent of your pay, and in your case also the employer’s 3 per cent.

However, after a year you can take a contributions holiday for up to five years, and then repeat that until you retire. And while on holiday you can put in the $1043 each year, perhaps as an automatic transfer of $87 a month.

At that stage, you’re in the same position as the self-employed and other non-employees. Because you miss out on employer contributions, it’s not as clear that KiwiSaver beats mortgage repayment.

Mathematically it might, but it might not.

I think, though, that KiwiSaver tends to win for a few reasons:

• Psychologically many people like to see a retirement savings fund growing. And the fund will be all set up for you to shovel much more money into once your mortgage is paid off.
• In the meantime, you’re learning about how markets rise and fall and rise again. There’s nothing like having “skin in the game” to take an interest.
• Your savings are diversified into shares, bonds and so on, rather than all being in property. This reduces your over-all risk.

In your case, you’ve got that expensive first year to get through. But the money is still yours, sitting in KiwiSaver for many years with compounding growth. It will give your KiwiSaver accounts a great start.

One more tip: Once your mortgage fixed term expires, consider making some of the loan a revolving credit mortgage. That will enable you to put all your income to work reducing your mortgage interest payments.

P.S. I love your stroppy attitude towards your mortgage! Increasing your savings each month is a great strategy.

AI suggest you just ask them outright, in person, “Do you receive any commissions?” According to the Financial Markets Authority, all financial service providers, including advisers, have to “tell you if they get paid by someone other than you — for example through commission.”

If you’re considering the fees-only advisers listed on the Info on Advisers page on www.maryholm.com, they have all agreed to the following:

“I guarantee that when I give any new client investment advice or help them to make any investments, the only money or other consideration I receive is explicitly stated fees that I charge the client. Any commissions or other considerations I receive from financial firms or others are passed on in full to the client.”

But I also say on that page, “Please note: I’m not in a position to check what the advisers in this table have told me. I’m relying on readers to report back if an adviser doesn’t stick to what they’ve said, so please tell me!”

The fact is that somebody could cheat. Usually, though, they get caught out in the end. Perhaps a former employee or someone from the organization paying the commission tells.