NZ Herald 8 December 2012

AI understand your concern, but I think Mark Twain’s quote is apt: “I am an old man and have known a great many troubles, but most of them never happened.”

Nobody can absolutely guarantee that your daughter’s account won’t fall to zero, but it would be astounding. Put it this way: if that does happen, we will all have more to worry about than our KiwiSaver balances.

It sounds as if your daughter is invested in a higher-risk growth fund. That’s appropriate as she won’t be spending the money for decades, and over long periods such funds usually grow more than low-risk ones. But they do fluctuate more. And — as you were told in what sounds like a rather unsympathetic phone conversation — the fluctuations in the early years of KiwiSaver have been mostly downwards.

However, to my knowledge all KiwiSaver growth funds hold a wide range of assets — mainly lots of different shares but often with some property, bonds and so on. (If anyone knows of a KiwiSaver fund that isn’t widely diversified, let’s hear about it.) And these assets never all go to zero at once.

As it happens, the international and New Zealand share markets have done well in the last couple of months, since you wrote to me, and your little girl’s balance is probably already higher. Ten years from now, I would be surprised if it isn’t way above $1000.

Still, if you can’t stomach the ups and downs, you can always switch at no cost to a lower-risk fund offered by the same provider. The path will be smoother, but the end result is likely to be quite a lot lower.

On fees, I don’t agree that they are “very small” on low balances — although they get relatively smaller as your balance rises.

That’s because a typical KiwiSaver fee is a flat rate plus a percentage of your balance — in a growth fund perhaps $30 plus 0.8 per cent. That amounts to:

• On a $1000 account, $30 plus $8, which is 3.8 per cent.
• On a $10,000 account, $30 plus $80, which is 1.1 per cent.
• On a $100,000 account, $30 plus $800, which is 0.83 per cent.

For an account to grow, with no new contributions, its return must be higher than the fees — easy for a large account, a bit harder for a smaller one.

If an account were to drop to near zero, could a fee put it into negative territory? Inland Revenue says, “Any fees charged are up to the individual providers.”

However, the government keeps an eye on KiwiSaver fees, which must be reasonable. I can’t see a provider putting an account into the red. If that worries you, email your provider and ask them to put their policy in writing.

Before doing that, though, you might consider moving to another provider, which would perhaps do better at handling your perfectly reasonable questions. All you have to do is contact the new provider, and they will arrange the switch.

I suggest choosing a provider on the basis of two main factors. One is the quality of their communications — including what’s on their website and their response to phone calls. The other is their fees. Lower fees make a big difference over a long period. See the KiwiSaver fees calculator on www.sorted.org.nz and information on www.canstar.co.nz/kiwi-saver.

Turning to your friend’s practice of contributing regularly to their child’s KiwiSaver account, that will of course boost the account balance. But as I’ve said in other recent Q&As, it might be better to save regularly for the child in a non-KiwiSaver account, to give flexibility about when the money is taken out and what it’s used for.

Two final points:

• Despite what you were told, KiwiSaver is not a government scheme, and there’s no government guarantee. However, there are laws that regulate it.
• You sound worried. Putting your little girl in KiwiSaver was a good move, and I’m sure she’ll be grateful for it — perhaps when she uses some of the money to buy her first home.

AFor those who didn’t see last week’s column, we’re talking about a retired person or couple, usually with a mortgage-free home, taking out a different type of mortgage. In most cases they make no repayments on it until the house is sold.

The most common uses of the money are for home improvements and debt repayment, said Rob Dowler, executive director of Safe Home Equity Release Plans Association, speaking at a recent symposium on how retirees spend their savings. The symposium was run by the Retirement Policy Research Centre (RPRC) at the University of Auckland.

Other common uses of the money include travel, buying a car, and aged care, said Dowler. A typical borrower is 73, has a house worth $330,000 and borrows $43,000, he said.

The big downside of reverse mortgages is that the loan grows with compounding interest. At current interest rates, after 30 years it would be more than eight times the borrowed amount. Because of this, you’re quite right, it’s worth looking at whether a family could do a DIY reverse mortgage.

Let’s start by assuming the three adult children of a retired couple will inherit the house, minus any mortgage. We’ll say the house is worth $500,000 in 2012, and the couple is considering a $60,000 reverse mortgage to make home improvements.

If the last parent dies 20 years later, the loan would have grown to about $250,000. The children’s inheritance would be halved.

Instead, each child contributes $20,000 in 2012, and the full inheritance is available for them. Sounds like a good deal, but we need to take into account what else the children would have done with their $20,000s.

If they could have invested that money at a higher return than the interest rate on the reverse mortgage, they would end up with more 20 years later. Their inheritance would be cut, but their investment would more than make up for that.

However, that’s a big ask. The current interest rate on ASB reverse mortgages is 7.25 per cent. To beat that, the children would have to go into pretty risky investments, whereas “lending” to their parents is low-risk.

Of course, not every adult child will have $20,000 available. One way around this might be for the parents to make their improvements gradually, so that each child puts in $5000 a year for four years. Even then, though, some might not be able to afford it.

And that’s where it could get tricky. Some families would cope with having only some of the children contribute, in exchange for a bigger share of the inheritance later on. But there would need to be some honest communication. And, as you say, it would be good to have the agreement documented legally, and for each family member to get their own advice.

On your other point, several councils let retired people delay paying their rates until their house is sold. The council charges interest, which is fair enough. Otherwise, other ratepayers are subsidizing participants.

Readers might want to ask if their council offers such a scheme. Be aware that, once again, compounding interest means you will end up owing the council a lot more than the rates relief. But still, it’s a way of freeing up some money to enjoy in retirement.

ALet’s take your points in order.

1. I presume you’re reacting to the fact that reverse mortgages grow fast. So yes, it’s really good to have enough savings so you don’t need one.
2. See the above Q&A.
3. Not everyone needs life insurance. Think about how your partner would manage if you died. If you have dependants, lots of debt, or you earn more than your partner, insurance is probably an excellent idea. But in many situations — especially later in life — a person will actually be better off financially if their partner dies. There’s one less mouth to feed. Not that I’m suggesting anything!
4. and 5. Those ideas sometimes work. Other options include: sharing the house with a boarder, converting part of the house to a flat and renting that out, or subdividing the land.

6. I think that’s a bit extreme. Many retired people love their homes. Why shouldn’t they stay living in them if possible, even if a reverse mortgage is less than ideal?