NZ Herald 9 April 2011

AIt’s the old “once bitten, twice shy” situation. But the doggie doesn’t bite any more. He’s turned into a big cuddly lovable creature.

There are two big differences between your old savings scheme and KiwiSaver schemes:

• As last week’s example showed, fees matter a lot. And the way advisers, providers and so on are rewarded has changed. Some undoubtedly still charge too much, but not all.

Have a look at the KiwiSaver Fee Calculator on www.sorted.org.nz, which shows that the lowest-fee providers charge less than a third of the highest-fee providers.

• The government and employers are pouring thousands of dollars into KiwiSaver accounts.

Employees earning less than $52,150 see their contributions to KiwiSaver tripled, with matching employer contributions and tax credits. Higher earning employees don’t do quite as well, as the tax credit stops at $1043 a year. But still, their contributions are always better than doubled.

Non-employees can contribute up to $1043 a year, and the tax credit doubles it. And for everyone, employed or not, the $1000 kick-start makes the first year even better.

Double or triple the money going in means double or triple the returns over the years, and so you get twice or three times as much out the other end.

Even if the fund manager performs terribly, it’s hard to imagine investors not doing pretty well. And for most, it’s a really good deal.

By the way, you’re right that many fund managers don’t match the market, especially after allowing for fees.

That’s why I favour index funds, which don’t try to beat market performance. They invest in the shares in a market index and therefore roughly match the market. And that’s generally pretty good, over longer periods. And because they are cheap to run, their fees are low.

KiwiSaver providers that largely use index funds are: ASB Group Investments’ default scheme, Civic Assurance, Smartshares and SuperLife.

AGosh, you’ve had to make some big adjustments. The good news is that NZ Super, which starts at age 65, will be a pay rise for you. A single person living alone — which sounds like you — gets $13,560 to $17,676 a year, depending on your tax bracket.

In light of your rising income in retirement, conventional wisdom says you shouldn’t try to save for retirement now. But that doesn’t take into account the KiwiSaver $1000 kick-start.

As a non-employee, you can get $1000 simply by signing up, even if you never contribute anything. Because you will join after age 60, the money will be tied up for five years, but then you can spend it — on yourself or the grandkids. You’d be silly not to at least take advantage of that.

Beyond that, you can also receive five years of tax credits of up to $1043 a year, matching the amount you put in. While it’s clearly hard for you to save, it seems a pity to miss out on $5215 from the government.

Could you give the children the gift of your time for the next few years, perhaps reading them stories from the library? Put the money you save into KiwiSaver, knowing it will be doubled. You’ll have more to spend on the grandkids — and hopefully yourself too — in five years’ time.

Alternatively, borrow $1043 a year from family or friends. You can pay them back, with interest, after you get access to your KiwiSaver money, and there’ll still be a good sum there for you.

AAn interesting idea, but not without risk.

To get others up with the play, the original letter was from an ASB customer with a five-year fixed mortgage at 8.9 per cent, expiring in February 2013. The reader wanted to know whether to repay the loan and switch to a floating mortgage, currently at a considerably lower rate.

I replied that he should ask the bank what the early repayment penalty would be, but it would probably be hefty. And if floating rates rose after he paid the penalty and made the switch, he might regret it.

I suggested he should probably stick with the status quo. But come February 2013, he might switch to half fixed and half floating, which works well for many people.

Now you’ve come up with another option, which looks promising given that ASB lets people with fixed mortgages make extra repayments of up to $500 a fortnight or $1000 a month, without penalty.

The balance on revolving credit loans is flexible, up to a maximum. So our reader could borrow, say, $1000 a month under that facility, and use it to pay down the fixed loan more quickly.

With the fixed loan, at 8.9 per cent, decreasing, and the revolving credit loan, at 5.75 per cent, increasing, he would benefit from the difference in the interest rates for the remaining two years.

Sounds good. But there are three hitches:

• Revolving credit loans are not for everybody. Some people find it too easy to borrow money to spend on entertainment, travel, restaurants, clothes and so on. You need to be disciplined.

• We’re not talking vast amounts — as you note.

Mike Davy, ASB’s general manager lending, put some numbers together, assuming our reader would meet “the usual loan servicing criteria.”

His example is of someone with a table loan — the most common type of mortgage — with two years remaining on a five-year fixed term. “If they are currently paying 8.9% interest, based on current rates they could make interest savings of $350 over the two years remaining on the fixed loan, if they increase their monthly payments by $1,000 per month and use a revolving credit facility like ASB’s Orbit to fund these payments.”

Davy took into account monthly fees and a $150 loan processing fee.

• If our reader increased his fixed loan repayments, he would have to maintain the additional payments — $1000 a month in our example — for the rest of the fixed term.

If the floating interest rate increases, the advantage of setting all of this up would diminish, but the reader would be stuck with the deal.

“In the example above, if the variable rate rises 50 basis points (half a percentage point) next March and then another 50 basis points in September, under this scenario the interest savings would fall to approximately $190,” says Davy.

The floating rate could even rise above the fixed rate before February 2013, so our reader would be going backwards.

On the other hand, it could do the opposite, falling further and bringing our reader bigger gains.

In recent years mortgage interest rates have certainly been volatile. For example, in late 2003, ASB charged 7.05 per cent a year on floating mortgages. By mid 2008, that had risen to 10.75, before plummeting to 5.75 per cent by late 2009. Nobody knows what will happen next.

What can we conclude? Well, $350 is not to be sneezed at, and the savings might even be bigger. But they might also be smaller. Is the potential gain worth the hassle of setting up a revolving credit loan?

If the reader plans to take up my suggestion of switching to half fixed and half floating after the fixed term expires, perhaps he should open a revolving credit loan now- assuming he has the discipline to handle it. After February 2013, that loan could be his floating half. And in the meantime he can use your strategy.

But as Davy points out, everyone’s circumstances are different. “It is important to speak to your bank first about all the different options that apply to you.”