This article was published on 4 October 2008. Some information may be out of date.


  • A happy share investor, and how you might get out of shares if you need to in the current market.
  • How does KiwiSaver mortgage diversion work for someone with a “2 + 2” contribution arrangement?

Plus: Winners of the Herald book giveaway

QAn old follower writing back with some news you might like to print on your Saturday column for the readers.

Back on 24 March 2001, you printed my question to you with the heading “Diversify — you might like it”. I laminated a copy and kept it in file as a reminder ever since.

Our home and the two rental properties are now freehold. I took your advice and invested the $55,000 from the company super scheme in global shares in our new super fund. It’s now doubled in value in 7 years. I had another investment which I realised in January 2008.

Life now is wonderful, and it’s what I have imagined it to be only it has arrived 10 years sooner for us.

I hope our story can empower someone else out there in getting started or reaffirming your belief and with a bit of sacrifice you too will realise your dream. Your dream can be anything.

We are still living like we have mortgages to pay but instead we save all that plus more from our wages.

Helping family and close friends has given me the most gratification and fulfilment ever. Life can be good.

AThanks for reporting back, and providing a positive story to brighten the current gloomy Business pages.

That idea of saving what used to go on your mortgage payments is a great way to build up a retirement fund.

I also like your letter because it shows — at a time when people are panicking and bailing out of share markets — that investments in share funds can be rewarding.

Not everyone will double their money in seven years — which means an average annual return of more than 10 per cent. In fact, it’s quite possible to suffer a loss in shares or a share fund over seven years. But it’s unusual to do so over more than ten years, and really unusual over 20 years, and healthy gains over such periods are common. So I do hope those with longer term horizons stay calm and stick with their share investments.

What if you have less time at hand before you plan to spend the money you’ve invested in shares? Or if the recent wild fluctuations have made you realize you can’t cope with volatile share markets?

A basic investment rule applies here: Don’t sell in panic.

Instead, move out of your share holdings gradually. You might, for instance, plan to sell 10 per cent of your holdings at the start of each of the next ten months or, better still, at the start of the next ten quarters — to string it out over two years or so. If your holdings are quite small, perhaps make it simpler by selling quarter now, another quarter in say six months, another six months after that, and the final holdings 18 months from now.

Why? As always, nobody knows where the markets will go from here. But we might be at the bottom of the trough. You’re going to feel sick later on if you realize you sold all your shares or share fund units at their cheapest prices in years.

But if you sell gradually, you’ll get low prices sometimes but relatively high prices at other times. It’s a much lower risk strategy.

What if you are in a KiwiSaver fund — or any other investment into which you have been drip feeding money — that includes some shares? If you want to reduce your share holding, start by asking your provider to switch any new contributions to a low-risk fund.

That way you won’t sell any shares at the current low prices. And slowly your total portfolio — all your investments — will become less risky as the new contributions grow.

If that’s not enough of a change for you, you could also set up a gradual plan. Ask the provider to move a portion of your current investments to the lower risk fund now, and other portions over time, as described above.

In investment, just as in Aesop’s race between the tortoise and the hare, slow but steady is the winning way.

QYour columns over the past couple of weeks present a pretty good argument for mortgage diversion.

Do the figures also stack up for those of us on the “2 per cent + 2 per cent” arrangement where both the employer and employee contribute 2 per cent?

I understand that because the employee contribution is lower under this arrangement, using mortgage diversion will result in a lower tax credit than those paying the standard 4 per cent.

Does this affect the decision or timing to start mortgage diversion?

AOnly for older KiwiSavers on low incomes.

As I’ve said earlier, generally mortgage diversion works well for employees with mortgages, except for some who earn less than $26,075 a year. A rule of thumb is that those people should still use mortgage diversion if they are under 35, but they should skip it if they are over 55. People aged 35 to 55 in that income bracket should use mortgage diversion if they are in a conservative KiwiSaver fund, but not if they are in a riskier fund.

Why the $26,075 cutoff? At that level, someone contributing 4 per cent of their pay is putting in $1,043 a year. And the government tax credit matches member contributions up to that level — but only on money left in KiwiSaver, not on money diverted out to a mortgage.

That means that if anyone earning less than $26,075 uses mortgage diversion, it will reduce their tax credit. That’s not the end of the world. For younger people, diversion is still the best strategy. But for those closer to NZ Super age, the lower tax credit has a bigger impact.

However, all of that assumes the employee is contributing the usual 4 per cent of their pay. It’s a bit different if they are doing “2 + 2” — a KiwiSaver option under which the employer and employee each contribute 2 per cent of the employee’s pay until April 2010. Then they each contribute 3 per cent for a year, and then 4 per cent from April 2011 on — at which point their contributions are the same as most other KiwiSavers’.

That last point is important. Because 2 + 2 is different for only the next two and a half years, it doesn’t greatly affect the mortgage diversion maths for most people. And, I should note here, the numbers are approximate anyway. The results depend on:

  • How long you will be in KiwiSaver.
  • Assumptions about mortgage interest rates and the returns on KiwiSaver funds of different risk levels, all of which change frequently.

Nonetheless, if you are contributing just 2 per cent of your pay to KiwiSaver and you use mortgage diversion, you will be affected more by the reduced tax credit.

Already — even before mortgage diversion — people on 2 + 2 receive a lower tax credit if they earn less than $52,150.

For example, someone earning $25,000 and contributing 4 per cent of pay, or $1,000, gets a $1,000 tax credit. But if they contribute 2 per cent, or $500, they get a $500 tax credit. And someone earning $50,000 and contributing 4 per cent, or $2,000, gets the maximum $1,043 tax credit.

But if they contribute 2 per cent, or $1,000, they get a $1,000 tax credit.

Add mortgage diversion to the mix, and anyone on 2 + 2 earning less than $104,300 is affected.

On $100,000, their $2,000 contribution will be halved with mortgage diversion to $1,000, so their tax credit will drop from $1,043 to $1,000. And on $50,000, their $1,000 contribution will be halved to $500, so their tax credit will drop from $1,000 to $500.

Still, because the lower 2 + 2 contribution levels last only a couple of years, they don’t make a huge difference to people who will be in KiwiSaver for decades.

Crunching numbers suggests that we should stick with out $26,075 cutoff, stating that every mortgaged employee earning more than that should still be better off using mortgage diversion, even with 2 + 2.

But for those earning less than that, we should change the age from 55 to 50. The 2 + 2 rule of thumb, then, is that people on less than $26,075 should still use mortgage diversion if they are under 35; they should skip it if they are over 50; and in between they should use mortgage diversion if they are in a conservative KiwiSaver fund, but not if they are in a riskier fund.


The following are winners in the Money Column giveaway of my new book, “KiwiSaver Max: How to get the best out of it”. We’ll run some of the winning entries over the next few weeks.

Chris Bullen, Whakatane; Jocelyn Coburn, Kawerau; Tony Cooper, Mt Albert, Auckland; Diane Davidson, Point England, Auckland; Ron Davis, Albany; Tonya Drabble, Eastbourne, Wellington; Harry Harbott, Ohope; Tony Kelly, Papakura, Auckland; Lucy Kennedy, Napier; Karen Jones, Whangarei; Roban Jury, Kawakawa; Doug Leigh, Mount Maunganui; Ruby Mardiono, Pinehill, Auckland; Gavan Murray, Te Atutu South, Auckland; Heather Rayner, Belmont, Auckland; Tangie Thomas, Greenlane, Auckland; Gerard van Daalen, Glendene, Auckland; J. Walker, Tauranga; Tracy Warrington, Army Bay, Auckland; Katherine Williams, Auckland City.

Congratulations to all of you. You should receive your books in the mail shortly.

No paywalls or ads — just generous people like you. All Kiwis deserve accurate, unbiased financial guidance. So let’s keep it free. Can you help? Every bit makes a difference.

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.