NZ Herald 8 February 2020

AYour last sentence worked! I hate to see someone going into overdraft — and paying interest on it — when they’ve got plenty of savings. Sorry to your wife, but that makes no sense.

You two are probably better off than three quarters of all retirees. There’s absolutely no reason why you shouldn’t spend your savings as you’ve outlined.

Your letter is reminiscent of the lead letter two weeks ago, except that that correspondent knows she’s well off, she just can’t bring herself to spend much.

Your wife seems less aware of her situation. And from some details you sent me, you’re probably more comfortable than even you realise. You may not have allowed for the returns you will earn on your savings before you spend all the money.

Given your wife’s concerns, I suggest you keep your savings in lower-risk KiwiSaver and other funds, so their value won’t drop much. That means they won’t grow fast either. But you should still get high enough returns that your spending can grow with inflation, and your savings will probably last into your nineties — when many people find NZ Super covers everything.

Is your wife still not convinced? As a back-up, you could always get a reverse mortgage later in life, or move to a less expensive house, but I doubt you’ll need to.

In the meantime, do travel, get a motorhome, and have fun while you’re young enough and well enough to enjoy it.

AYour friend is an impressive saver. The supported living payment — which is for people with a health condition, injury or disability — is just over $300 a week before tax for a single person.

Can she contribute to KiwiSaver without affecting that income?

In last week’s column, I quoted a Ministry of Social Development official as saying that, generally, if a beneficiary contributed to KiwiSaver it “would not affect their benefit unless it was income earnt through working.”

But it might be different if they deposited significant lump sums into KiwiSaver — hardly $25 a week — or were applying for “hardship assistance, for example, Temporary Additional Support.”

The official added, “We encourage people who have questions about their KiwiSaver contributions to give us a call and discuss their situation with us.” For peace of mind, your friend might want to do that. She can call 0800 559 009 on weekdays or Saturday mornings.

As far as KiwiSaver goes, there will be no problem with her taking part. And it will be great if she does, as she’ll get the government contribution each year, as well as returns on her savings.

According to Sorted’s KiwiSaver Savings Calculator, she might have around $9000 in a low or medium-risk fund by the time she’s 65. And I bet she’ll make that go far in retirement.

I have to add, though, that many beneficiaries say there’s no way they can save money.

That’s why the Commission for Financial Capability’s recommendation — that all beneficiaries join KiwiSaver, and the government contributes 3 per cent of their benefit while the beneficiary doesn’t have to contribute anything — would really help many.

ANot in Smartshares — which offer the only ETFs, or exchange traded funds, in this country, says CEO Hugh Stevens.

For the benefit of others, the article was about a New Zealander who invested $6000 last year in a US-based ETF that recently went into liquidation. He got some of his money back, but had to pay $2000 in resident withholding tax.

“This issue does not affect Smartshares ETFs, as ETFs in New Zealand apply different tax rules that do not tax dividends,” says Stevens. “One benefit of investing offshore through local Smartshares ETFs is that we take care of all the tax issues for investors.”

He adds if you invest directly in foreign ETFs, there are “a number of hidden costs that often vastly exceed the costs of the Smartshares ETFs. These costs are either significantly lower in a Smartshares fund or eliminated completely.”

He lists the following charges:

• “Currency exchange will be charged by the NZ broker (0.50 per cent to 2 per cent)
• Foreign shares must be held by a custodian (often 0.25 per cent a year)
• Brokerage charges are higher for offshore ETFs (typically 0.6 per cent)
• A tax return must be submitted and tax is at 33 per cent (instead of 28 per cent through a Smartshares ETF, with some exceptions — this is a very complicated area!)”

Stevens says that “investors going offshore also expose themselves to a number of hidden risks.

“While it is now easy to buy and sell US and other international shares at the click of a button, investors do not often consider how they will reclaim their investment if something goes wrong with the offshore investment.

“If they invest in a New Zealand-regulated product, like Smartshares ETFs, they are protected by the New Zealand regulator, the FMA, and by the full force of New Zealand law.

“If something goes wrong, our investors can call me, Public Trust who is our supervisor, or the FMA. Imagine having to front up to a US complaints service, regulator or court to reclaim your investment.”

Stevens adds that there could be an issue in future with US estate taxes. “This potential problem for New Zealanders investing directly in US ETFs has not been clearly brought to the investing public’s attention. If you have more than $60,000 invested in a US listed entity and you die, your estate could be subject to 40 per cent estate tax. Investors in Smartshares are not exposed to this risk.”

AYou’re quite right. I should have thought more about the reader’s question.

“Your correspondent is essentially correct,” says am FMA spokesperson. “All retail schemes managed by licensed MIS (managed investment scheme) managers have their assets held by an independent custodian. This includes all KiwiSaver schemes.”

But what if the custodian gets into financial trouble?

The spokesperson continues, “The scheme assets are held independently of the MIS manager (i.e. KiwiSaver provider) and of the custodian itself, in other words ‘ring fenced.’ Any claims against the MIS manager or custodian would not affect the assets of the scheme.”

Want more detail? Read on.

AOkay, let’s get this sorted.

“Under the law, supervisors are responsible for custody,” says an FMA spokesperson. “As such, by default, the supervisor of the scheme is also its custodian. However, a supervisor may appoint another appropriate independent entity as custodian.

“The FMA found that most KiwiSaver funds (77 per cent) are held in custody by supervisors or a nominee company set up by the supervisor.

“In either case, custody of scheme money and property are held independently and for the benefit of the scheme.”

What, exactly, are the different supervisor and custodian roles?

“As the title implies, a supervisor is responsible for supervising the fund manager and looking after investors’ interests. They perform checks on the fund manager to ensure the manager is complying with the law and the requirements of the scheme’s trust deed. If necessary, the supervisor will report any breaches to the FMA.”

On the other hand, “Custodians are responsible for holding and safeguarding the scheme property and for keeping records of the scheme property.”

How can we know a custodian is honest?

“Supervisors are licensed by the FMA. This means they must have appropriate systems in place, their executives undergo ‘fit and proper’ tests, and they are subject to ongoing oversight by the FMA,” says the spokesperson.

“Custodians are not licensed but are accountable to the supervisor and must provide annual, assurance reports to the supervisor. These assurance reports are based on a qualified auditor’s review of processes and controls of the custodian to ensure there are sufficient protections in place.

“In addition, each scheme’s financial statements are audited by a qualified auditor.”

Good enough for you? In the end, no regulatory system can absolutely guarantee everyone is behaving as they should. But these days New Zealand regulates financial institutions much more than it used to.