This article was published on 7 August 2010. Some information may be out of date.

Q&As

  • Does it make sense to try to pick where Baby Boomers will retire and buy property there?
  • How KiwiSaver works if you move from employment to self-employment
  • Should couple use lump sum to repay a commercial mortgage or for other investment — and how KiwiSaver affects this?
  • Some alternatives for investing in emerging markets

QIt is obvious that we are in the grip of a recession. This creates an opportunity for investors to capitalise on the recession and enter the property market. The burning question for the over 50s is “where will the Baby Boomers trade down to from Auckland?” If you anticipate this correctly you will prosper.

The main ingredients required for an ideal retirement city are a good hospital, flat land (porous and immune to flooding), good-value-for-money housing, golf courses, fishing, centrally located and an international airport.

My pick is Rotorua. Where do you think the Jafas will gravitate to?

By the way Rotorua has the bonus of thermal hot water and heating, in places, for as little as $210 a year. With power price surges this is extremely appealing. Economical living will be the key in retirement.

AFirstly, we are not in a recession any longer — at least by the economists’ definition. Still, property is not exactly booming, so I take your point that now might seem like a good time to buy — if you can correctly predict where prices will rise fast. But that’s a big “if”.

Everyone already knows the Boomers will retire in the next few decades, and that Rotorua will look attractive to many of them. It’s likely, then, that those two factors are already reflected in property prices in the area, pushing them higher than if the city were unattractive and there had been no Baby Boom.

Whether property prices in Rotorua will shoot up particularly fast in future, then, is far from certain. And the same could be said for any other likely spot.

P.S. I notice your email address includes something about Lake Tarawera. Would it be uncharitable of me to wonder if you just might be trying to drum up interest in a delightful property you happen to own?

QMy income is partly from employment and partly self-employment. With regard to the former, 4 per cent of my salary is currently paid into a KiwiSaver account. As at the end of this year, I expect to be fully self-employed. Will I need to, at that point, seek a contribution holiday?

Are there any particular advantages to a self-employed person paying into a KiwiSaver scheme as opposed to any other managed fund?

AThere’s no such thing as taking a contributions holiday from KiwiSaver if you are self-employed. Those holidays are only for employees. The self-employed and other non-employees can simply stop putting money into KiwiSaver whenever they wish.

The more important question is whether it’s wise to stop contributing once you are self-employed. And the answer is definitely not. While the self-employed and non-employees miss out on employer contributions, you still get tax credits from the government, which match your contributions dollar for dollar up to $20 a week, or $1043 a year.

This doubling of your contributions means your retirement savings will be twice as big as they would have been in another managed fund — assuming you make the same return in both.

So do try to contribute enough to get the maximum tax credit. A good way to do that is to set up an automatic monthly contribution of $87.

For any saving beyond that, though, I suggest you use another managed fund, because you can access the money if you should need it. It’s not uncommon for the self-employed to suddenly find they need funds for something unexpected.

QWe took out a superannuation savings scheme with our bank six years ago. As we were about 15 years from retiring we entered into a growth fund.

We were recently informed by our bank that they are closing this scheme from October, as they believe KiwiSaver and the PIE regime offer better options, or we can take the money and invest it as we wish.

As you are aware the recession has severely impacted on superannuation schemes, and our savings do not even equate to the amount we have put in to it over the past six years. We are very annoyed as we were warned when we took out this scheme we could not touch the money for 15 years and because of our ages at the time (early forties) they strongly recommended a growth fund.

What should we do? We are now 10 years from retiring and have lost trust in our bank, who have pulled the plug on our plan at its lowest point.

We are currently building a commercial property (with leases signed), but have an enormous mortgage on this. My husband is self-employed on a steady income and I am an employee. I belong to KiwiSaver, but he does not.

Should we take the retirement savings and help pay off our debt and start again or should we invest the money ourselves?

We would be very grateful for your advice on all of the above.

AIt sounds as if you are in much the same situation as other recent correspondents whose ASB funds are being closed down. As I’ve said to them, you could simply transfer to a new, similar fund, and it shouldn’t make much difference to your long-term investment.

The advice you received, to go with growth over 15 years, was good. Nobody foresaw the big downturn, but in any case you still have ten years until retirement, and perhaps several more year before you will spend the money, so there’s time to regain lost ground.

If you move to another growth fund, though, I suggest you plan to gradually transfer the money to a more conservative fund as you approach spending time.

However, there’s another complication for you, and that’s the mortgage on the commercial property. You’re actually lucky to have the option of putting your super scheme money towards repaying the mortgage, given that until now you couldn’t touch that money.

The trouble with options is that you have to make a choice. And in this case it’s not easy.

Repaying a mortgage improves your wealth as much as an investment that earns whatever the mortgage interest rate is.

For example, repaying a 6 per cent home mortgage is as good as making 6 per cent after fees and taxes on an investment. And generally speaking, the only way to get a return that high is to go for a fairly risky investment, whereas mortgage repayment is risk-free.

On an investment property, however, it’s different. You can tax deduct the mortgage interest, so it costs you less.

If, for example, you have a 7 per cent mortgage and you are in the 33 per cent tax bracket, the tax deduction is worth 7 times 0.33, which comes to 2.31 per cent. After tax, you are paying 7 minus 2.31, or 4.69 per cent on the mortgage. To do better elsewhere you need an investment returning more than 4.69 per cent, which is not such a tall order as 6 per cent.

Work out your after-tax mortgage interest rate, and consider whether you can earn more than that by investing elsewhere. Keep in mind, though, that repaying a mortgage reduces risk, and that’s pretty appealing these days. A good compromise might be to use half the money for mortgage repayment and invest the rest in a managed fund, keeping it accessible so you can use it to repay the mortgage if times get tough.

Can you cope with another complication — a side issue? A couple of paragraphs ago I said, “generally speaking” the only way to get a return as high as your home mortgage interest rate is in a fairly risky investment. KiwiSaver changes that.

Because of the extra money that comes into KiwiSaver accounts from the government, and in many cases from employers, you can get a pretty high return, at relatively low risk, on the money you yourself contribute.

That means that people with mortgages are better off taking part in KiwiSaver than putting savings into fast mortgage repayment. However, they should contribute only enough to get all the incentives. For employees, that’s 2 per cent of pay or $1043 a year, whichever is higher, and for everyone else it’s $1043 a year. Further savings should probably go to mortgage repayments.

In your family’s case, you are in KiwiSaver, so that’s good, but your husband isn’t. I suggest he joins, so he doesn’t miss out on $1043 of government money each year, plus the $1000 kick-start.

But it wouldn’t be wise to put the super scheme money into KiwiSaver, as lump sums don’t attract any extra incentives. Better to put it into the mortgage, or half mortgage and half managed fund, as suggested above.

QIn your article about ASB funds wind-up, you have ignored all but local unlisted managed funds when talking of alternatives. Do you have something against listed investment trusts?

Templeton Emerging Markets Investment Trust is London-based but is dually listed on the NZX. Its return for the last 12 months was 40.6 per cent (in sterling) and its total return over the last 5 years was 177.3 per cent. Investors should be aware of these alternatives which, as an added benefit, have significantly lower management fees than unit trusts.

What are the downsides? First, is the one of currency where the fund is denominated in sterling, US dollars or whatever. A rising NZ dollar will, of course, erode returns although a falling NZ dollar will enhance them. Buying at current levels could be a benefit given time. Local funds investing offshore will have the same issue unless they hedge, which is a cost to the fund and to returns.

The second is tax, as none of those overseas domiciled funds will be subject to the PIE regime.

AI have nothing against listed investment trusts. However, overseas-based funds are somewhat more complicated to invest in than locally based funds. And for many people, simplicity is — quite rightly — an important factor in their investment decisions.

Still, as you point out, there are advantages to venturing offshore. Lower fees are a big plus. And the Templeton fund has certainly performed impressively — albeit including a big drop in late 2008 and early 2009, along with probably all similar products. Would-be investors should note the volatility of every emerging markets fund.

Meanwhile, I’ve also received an email from HSBC — Hongkong and Shanghai Banking Corp — pointing out that it offers BRIC funds, so-called because they invest in shares in Brazil, Russia, India and China.

I don’t know a lot about either the Templeton or HSBC products, so I can’t recommend them. But readers might want to look into them.

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.