NZ Herald 4 July 2020

AI quite agree. Let’s get the happiness happening as soon as possible. And you’ve got the green light from Inland Revenue!

“Cash gifts are not taxable income for income tax purposes, even if paid regularly and assuming they are not distributions from a trust, or a pension etc.” says a spokesperson.

“There is no gift duty, and the parents cannot claim a donation tax credit or tax deduction for the gifts.”

She adds, “Essentially a gift needs to be voluntary, not be a contractual arrangement and must be made with no expectation of the donor (in this example the parents) getting something material, such as services, in return.

“Therefore, so long as the son hasn’t agreed to provide or do something in return for the parents making the payments, and the parents are not legally bound in some way to make the gifts (so they are voluntary) then we can’t see a problem.”

ASee the Q&A above. You won’t be able to give your KiwiSaver account, as such, to your children, and it would probably be complicated to transfer your other investments.

But you should be able to withdraw money from the ETFs (exchange traded funds) whenever you want to. And you can access your KiwiSaver fund from age 65. Give the children that money, and perhaps suggest how they invest it.

There’s one other issue about giving away money that doesn’t apply to the above correspondent. She says she and her husband are unlikely to need the residential care subsidy that the government pays for long-term care in a hospital or rest home. But you — and other readers — might need the subsidy later on.

When someone over 65 applies for the subsidy, their assets must be below a certain level — which varies depending on circumstances.

To prevent you from giving away lots of assets to make yourself eligible, the government may include in your assets any gifts you’ve made above a limit.

Here’s the deal. You and your partner can give away, without affecting your eligibility:

• Up to $6,500 of assets each year in the five years before you apply for the subsidy.
• Up to $27,000 a year for assets given away more than five years before.

What this amounts to:

• If you’re comfortably off and don’t expect to need government help with care, don’t worry about this.
• If you might need the subsidy later on, but probably not in the next five years, it would be wise to limit your gifts to $27,000 or less a year.
• If you might need that help within the next five years, it would be wise to limit your gifts to $6,500 or less a year.

More on the subsidy here.

AHold your horses — although I must admit I did a double take when looking at the table you sent me.

It showed Simplicity’s Conservative Fund’s return for the year ending May 31 was 7.94 per cent after fees but before tax, and for two years it was 7.38 per cent a year. Those are good returns for a high-risk fund, and seem to be way out of line for a low-risk one.

But they are correct. And it’s worth looking into why, because what has happened affects investors in most KiwiSaver or non-KiwiSaver funds.

The unusually high returns reflect three things, says Simplicity managing director Sam Stubbs:

• “Always being fully invested ie. very low cash holdings.
• “The collapse in global interest rates, which has made higher returning investment grade bonds more valuable.
• “None of our funds holds any fixed interest below investment grade. While investment grade bonds rose in value because interest rates fell, sub-investment grade bonds fell in value as investors worried about whether they would get repaid.”

On the first point, the Simplicity Conservative Fund holds 76 per cent bonds, 22 per cent shares and just 2 per cent cash. As we all know, cash — term deposits and the like — have paid pathetically low interest for a while now.

Interest paid on newly issued bonds has also fallen, but that’s where Stubbs’ second point comes in. Bonds can be bought and sold. And when interest rates fall, bonds that were issued several years ago — and therefore have higher interest rates — become more desirable. So their value rises.

In the last couple of years, this has happened dramatically, with interest rates hitting all-time lows. Even if a KiwiSaver fund doesn’t sell its older higher-interest bonds, it takes into account their changing value when it values its units. In this case that means a big jump in unit value.

The third point is about the quality of the fund’s bonds. If nothing else was going on, the value of bonds below investment grade would also rise when interest rates fall. But in troubled economic times — like now — that is more than offset by people’s fears that the issuers of sub-investment grade bonds might default.

Says Stubbs, “Many other fixed interest funds over this time have sought to compensate for high fees by taking on more credit risk to drive up returns. This has impacted their returns.”

Still, Simplicity is not alone in reporting unusually high returns on funds heavily invested in bonds.

While that provider topped Morningstar’s list of conservative KiwiSaver funds for returns over one year and three years ending March 31, many other bond fund managers have also done well.

That’s great for investors in KiwiSaver and other funds with heavy investments in high-quality bonds. But what does the future hold?

“Going forward investors should expect lower returns, reflecting lower interest rates,” says Stubbs. “We have been careful to forewarn investors that future returns are unlikely to match those of the recent past ie. the last one to two years.”

What’s more, just as bond values rise when interest rates fall, so does the reverse happen.

“The issue going forward is that the traditionally safe haven of bonds will not provide protection for investors if and eventually when, interest rates rise,” says Andrew Lance, chief operating officer of Simplicity.

“There is no sign that this will happen in the foreseeable future. Low interest rates look to be with us for an extended time. There are no apparent inflationary pressures and governments have a vested interest in keeping rates low.

“One day, however, it seems likely that rates will rise and fixed interest investments will be negatively affected. The losses are unlikely to be anything like the losses you see from shares in a bear market, but bonds will not protect conservative investors in the way they traditionally have.”

Because of this, Lance says Simplicity is “working on prudent alternatives to traditional bond investments, such as our recent investments in floating rate mortgages.”

No doubt other KiwiSaver providers are also addressing this issue. But still, investors in funds with lots of bonds should expect future returns to be lower — and perhaps negative at times if interest rates rise fast.

Almost all KiwiSaver funds — except low-risk funds invested fully in cash and high-risk funds invested fully in shares or property — hold some bonds.

To find out how much of your fund is invested in bonds, use “Check your current fund” in the KiwiSaver Fund Finder on sorted.org.nz.

But that doesn’t tell you about the quality of the bonds. You could also email your provider and ask what percentage of their bonds are high-quality “investment grade”.

AGood news.

The bill that would allow you to receive your own NZ Super, regardless of your partner’s pension situation, “is still going through the House and the proposed date of implementation is 9th November,” says a spokesperson for Minister of Social Development Carmel Sepuloni.

She adds that she can’t comment further at this stage. But it looks good for you.

ATwelve weeks is correct.

“Clients can apply for NZ Super or Veteran’s Pension from 12 weeks before their 65th birthday,” says Kay Read, group general manager of client service delivery at the Ministry of Social Development. “This includes paper and online applications.”

After I got your letter, I found two places online that said eight weeks, but Read says these have now been updated.

Good on you for drawing the government’s attention to this.