This article was published on 30 November 2013. Some information may be out of date.

Q&As

  • Should people be forced to put some of their KiwiSaver money into an annuity?
  • Highly leveraged property investing is risky
  • An investor in both puts some perspective on shares versus property
  • Meaningful Christmas gifts

QA few weeks ago, your column discussed some of the changes the Financial Services Council wants to make to KiwiSaver (removing the tax credit and cutting PIE tax rates). I’m surprised no-one has picked up on the other big change the FSC advocates — to make it compulsory for people to spend part of their KiwiSaver funds on purchasing an annuity at retirement.

I would think that, for many people, this would skew the odds away from KiwiSaver and towards rental property — or even towards non-KiwiSaver PIEs, both of which allow us to spend our retirement savings how we think best.

Personally, I find even knowing that the FSC may be lobbying for compulsory annuities is a bit off-putting, though of course I’m still going to put in the $1042.

AFirstly, for the benefit of others, an annuity is like a pension. You pay a lump sum, and receive a regular payment — possibly rising to take inflation into account — until you die.

It’s like insurance against outliving your savings. If you die soon after starting an annuity, it’s bad news. If you live long enough to get the telegram from the Queen — if she still does that — it’s great news.

A couple of decades ago, about ten companies offered annuities in New Zealand. Now nobody does, for various reasons. But I still find that when I explain the concept to people, a lot wish there was such a product — as long as the regular payments are reasonable.

The Financial Services Council is not the only one to suggest that a portion of everyone’s KiwiSaver savings should go into an annuity. The idea is usually to discourage people from blowing all their KiwiSaver savings soon after they retire. That makes sense, although I reckon the vast majority of retirees wouldn’t squander their savings anyway.

There’s another issue here, too. It’s one thing for a government to change the KiwiSaver tax credit or contribution level. You can take a contributions holiday if you don’t like the new rules. But it’s another thing to change the rules on how KiwiSaver savings can be spent. People have joined the scheme thinking they’ll have flexibility in their retirement spending, and I don’t think it’s fair to change that.

What I would like to see is an opt-out system, like what happens when a new employee is put into KiwiSaver but can withdraw in a few weeks. When you reach 65 — or whenever you can start withdrawing KiwiSaver money — you could be told that half your money will go into an annuity in three months time, unless you say you don’t want that.

That would introduce people to the annuity concept, and I bet many would stay in. But those who have other plans — probably including people who don’t expect to live long and therefore wouldn’t receive many annuity payments — could opt out.

The government would have to either set up an annuity scheme or assist private companies to do so. How about that as an election issue?

Meanwhile, I agree that you should keep contributing to KiwiSaver. Just because an organization lobbies for something, doesn’t mean it will happen.

The only way I can picture a government making KiwiSaver annuities compulsory would be if they set up a new scheme that we’ll call “KiwiSaver 2”. Under this idea, the current KiwiSaver — call it KiwiSaver 1 — would stop receiving contributions, but accounts would still grow and you could do what you want with that money in retirement.

Meanwhile, KiwiSaver 2 would start under new rules, which could include compulsory annuities. Anyone who didn’t like that deal could opt out, and save elsewhere. That would be fair to all.

QI was just reading last week’s column. With respect to the first question, it was a good read and a good piece of educational information for the unaware/uneducated person with regards to leverage.

I was wondering why you only focused on “stage 1” leverage with the property? An investor with basic property investment knowledge would take advantage of leveraging off the property they purchased at perhaps year 4 or 5 by purchasing another investment property.

Therefore over a 10-year period there will be a duplicated leveraging effect, and wealth will grow phenomenally as all four properties increase in value compared to share investment. A good investor may have four-plus houses over the course of 10 years and their net worth will be far greater than the $450,000 you stated in the article.

I have been investing in property for almost 6 years from the age of 19 and I already own three Auckland properties (in the process of buying two more) and one Tauranga property.

My best investment was a $23,000 property that was undervalued. Six months later I purchased another property by leveraging off the first property. Within 24 months, this $23,000 has now turned into $210,000 worth of equity. This is the true power of leverage in the property world and, sadly, not many people know about this.

AIt’s true that it’s easier to use the equity in one property to borrow to buy another property than it is to do the same with shares — although either is possible.

But I hope you read closely last week’s bit about how, when things go wrong, leverage makes it worse. You’ve been in the market mainly through a period of property price growth. When prices fall — and there are always times when that happens — it’s often the highly leveraged investor like you who crashes. I suggest you slow down and build up a bit more equity in your properties.

See the next letter for a couple of examples of things that can go wrong with investment property.

QHaving read the recent letters re shares verses property, and the aggressive tone of a couple of your readers, I want to come out on your side. It does seem to me that some property investors have a singularly one-eyed opinion of their chosen choice of investment, and I do wonder if their attacks on share investors masks a form of insecurity that maybe they have made the wrong choice?

I invest in both property and shares, and use gearing in both cases to maximise my returns. The rent I receive covers my mortgage payments, and the dividends I receive cover my margin loan interest. My returns are tax-free in both cases as I never sell my properties or shares, I just buy and hold, and buy direct shares as well as index linked shares like Smartshares.

I stopped buying properties many years ago because of the hassle. Currently I have a leaking apartment that requires $120,000 of repair work, plus because it is on leasehold land the ground rent increases have destroyed its value as an investment. My other property doesn’t leak, but last year needed repainting ($4,000), plus a new dishwasher, this year I had a massive tree removed ($3,000), and soon it will need re-carpeting.

It is true that some shares end up worth nothing — I owned Feltex — and I completely missed out on Xero. But overall with a balanced portfolio of about 100 NZ and Aussie shares I have made good returns over the years.

What is interesting is that most of the people I knew who where property investors have now got out of the market, and some are now in the share market, having joined the share club that I set up to give my friends a chance to learn about the share market.

Our share club was started 5 years ago, and we have put in a total of $130,000 (about $2000 per month is invested). We have been investing right through the global financial crises, and now find ourselves with a portfolio worth $165,000. Hardly speculative gambling!

AIt’s good to get the perspective of someone familiar with both property and shares.

Your share club’s net returns look to be more than 9 per cent a year. Well done.

MEANINGFUL CHRISTMAS GIFTS

Many charities offer Christmas gift programmes. You participate by buying items for people in need that are given on behalf of your family or friends. For example, you might donate money for school equipment for children in developing countries. You receive an acknowledgement to give to your relative or friend to show them what they have “donated” to the children.

It makes a great Christmas gift — more meaningful than buying stuff for one another that is often not wanted.

Each year, this column runs a list of charities that take part in these programmes. I’ve asked each one to describe or “sell” their programme in 20 words or less:

  • Caritas Aotearoa New Zealand: 0800 22 10 22 or www.caritasgifts.org.nz. “Caritas Gifts of hope, life, peace and learning help our life-changing work around the world and in Aotearoa New Zealand.”
  • ChildFund New Zealand: 0800 223 111 or childfund.org.nz/catalogue. “Goats, long drops and farmers’ hoes aren’t your usual presents but they’ll keep on giving for families in need.”
  • Christian World Service: 0800 747 372 or www.gift.org.nz. “Choose something that works and is needed. From bees to legal training your gift changes lives for the better.”
  • Leprosy Mission New Zealand: 0800 862 873 or www.reallygoodgifts.org.nz. “Delight loved ones with Really Good Gifts this Christmas, bring the light of God’s love into lives affected by leprosy.”
  • MEND NZ: 027 329 8368 or www.mend.org.nz/giving. “Even small change can help MEND make big changes to lives of disabled people through surgery, mobility and hearing aids!”
  • Salvation Army: www.salvationarmy.org.nz/givehope. “These gifts will help provide opportunities, better living conditions, education and freedom for people overseas.”
  • Save the Children New Zealand: 0800 167 168 or http://shop.savethechildren.org.nz. “You can help families earn a living, or ensure children receive education, healthcare, toys, food or clean water.”
  • TEAR Fund: 0800 800 777 or www.giftforlife.co.nz. “Unique, practical, heart-warming and life-changing gifts. You won’t get their goat with a pressie from Gift for Life.”
  • The Fred Hollows Foundation: 0800 227 229 or https://www.hollows.org.nz/gift-of-sight. “Give your loved one a Gift of Sight card and help restore sight to someone for $25.”
  • UNICEF New Zealand 0800 537 739 or www.unicef.org.nz/survivalgifts. “UNICEF Survival Gifts make a real and life changing difference to children around the world, buy yours today”
  • World Vision: 0800 24 5000 or www.worldvision.org.nz/smiles. “This Christmas choose a life-changing gift to make everyone Smile.”

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. 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.