Kiwisaver

KiwiSaver Q&A: We explore the rules around first time home purchase and the pros and cons of fasttracking the mortgage versus saving

Amanda Morrall — Mon, 20 Feb 2012 03:14:50 +0000

Question: Are we able to use our accumulated KiwiSaver funds subsequent to having bought the home? Second, are we able to use the funds to reduce the capital on a non-commercial mortgage? And third, we're both nudging our 40s, I'm inclined to think that the savings are more important than paying down borrowed capital. Both of us earn well in excess of the average wage, so the mortgage is manageable, we're good with our money, and we're on track to pay it off within 15 years (we owe around $270k). Money in the bank seems a lot more prudent than reducing the capital, but your calculators tell me we will save around $24k in interest payments.

Answer:

Thanks for raising this great question. I'll remind you that I'm not a financial advisor however our new hire analyst Craig Simpson is an authorised financial advisor and I have drawn on some of his knowledge and advice with respect to the latter part of your question.

First the bad news: If you have already purchased your home, unfortunately you can't access your KiwiSavings to pay down the mortgage.

The good news is (and this is of interest primarily to other prospective first time home buyers) is that you can use your KiwiSaver money to finance a non-commercial lending arrangement on a first time home. Provided you have all the supporting documents to prove you are making a first time home purchase, you can arrange to have those funds released to the creditor via a solicitor.

As the procedure can be quite timely, providers caution buyers against putting in an offer to purchase without first consulting them well in advance, and also advising the realtor and solicitors so all parties are on the same page. As this is a relatively new facility, there seems to be some confusion and conflicting information among the parties involved in the transaction. Also, it is important to bear in mind that the money is distributed at the time the house sale goes unconditional. Buyers shouldn't assume that the deposit money can used to hold a house when an offer is made.

On the savings versus debt debate, there are a few scenarios that you may want to consider.

The variables you provided us with are as follows:

$270,000 mortgage
Approximately $35,000 in KiwiSaver funds (excluding member tax credits and kick start)
Monthly mortgage payments of $2,210
Excess monthly savings of $500 a month

If you were to use that extra $500 a month to fast track your mortgage, that would reduce the life of the mortgage by fours years approximately, saving you roughly $35,000 in interest payments.

On the other hand, if you invested that money at the bank on a term deposit that netted you 2.5% per annum (after fees, tax and inflation) you could in 15 years have $127,255.91 set aside. On the face of it, that would seem a slam dunk case for savings versus debt repayment however Simpson said the savings route is riddled with risk for many Kiwis. That's because despite the best of intentions, that money earmarked for savings gets spent on emergencies, travel, incidentals and education cost for children and a host of other unanticipated expenses. So while it may seem more economical to save rather than pay down debt, for all but the most disciplined this is a route fraught with risk It seems far likely likely to get squander if there is a firm agreement in place to repay the creditor.

Another option you may wish to consider is to embark on a hard core savings plan once the mortgage has been repaid prematurely in 11 years and four months by our estimate. By redirecting that mortgage money (plus the $500) into a dedicated savings account earning 2.5% (after fees, tax and inflation), you'll have saved $141,973.46 approximately in four years. Although there same savings risk exist, the short-term frame for banking that money reduces the likelihood of the money getting squandered or used for another purpose.

The bonus for the couple in this case is that they'll also be building their retirement savings nestegg at a much faster rate because they'll have left their KiwiSaver in tact.

Simpson said some issues to consider are your risk appetite, your employment security and a potential increase in the OCR rate if that's what your mortgage rate is tied to. Other risks to consider are the possibility of a market crash, or another global financial crisis.

Having a suitably qualified financial advisor review your circumstances in whole would be a prudent move to ensure your objectives are properly met, said Simpson.

Here's some links that may be useful for first time home buyers?

Housing New Zealand Corporation - for rules on additional home buying subsidies for first homes.

Debt vs saving calculator

Note: These opinions are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.

Morningstar names Milford Asset Management, OnePath and Westpac as finalists for KiwiSaver fund manager of the year awards

Amanda Morrall — Tue, 21 Feb 2012 01:25:41 +0000

Auckland-based Milford Asset Management has been named as a finalist for the KiwiSaver fund manager year of the awards for 2011 along with Westpac and default provider OnePath, which is owned by ANZ.

Research house Morningstar, which will announce the winner at a March 1 awards ceremony, said finalists were selected from a pool of 16 providers on the basis of "fund research analyst conviction, risk adjusted medium to long-term track record, and performance for the 2011 calendar year.''

Chris Douglas, co-head of research for Morningstar, said the outfit also took into consideration the experience and assessment from a group of graduate students brought in to mystery shop KiwiSaver providers under view. (See Amanda Morrall's interview here with Chris Douglas explaining the selection process).

Milford Asset's Management's active growth fund (formerly known as its aggressive fund) has, according to Morningstar's Dec.2011 KiwiSaver report, delivered annual after tax and after fee returns of 8.1% per annum over four years. That's in contrast to the average -1.6% per annum four year return generated by its peer group.

OnePath's conservative default fund has delivered four year returns of 5.2% per annum making it the best performing default fund in the market.

On a peer relative basis, Douglas said Westpac was also a standout performance wise, not only for the past year but since inception, taking 3 and 4th place for balanced and moderate funds.

Douglas said Westpac also scored well around issues of transparency, disclosure and the "investor experience.''

The other categories and nominees are as follows.

New Zealand Fund Manager of the Year		AMP Capital Investors, Milford Asset Management, OnePath
Fixed Interest Category, New Zealand		AMP Capital Investors, OnePath, TOWER BondPlus
Domestic Equities Category, New Zealand		AMP Capital Investors, Fisher Funds, Milford Asset Management
International Equities Category, New Zealand		Brook Walter Scott, Elevation Capital, OnePath

Amanda Morrall talks to Chris Douglas about Morningstar's KiwiSaver fund manager of the year award for 2011. Your pick?

Amanda Morrall — Fri, 17 Feb 2012 00:38:21 +0000

Finalists for the 2011 KiwiSaver fund manager of the year award will be named next week in advance of Morningstar's fourth annual awards night March 1.

Co-head of research Chris Douglas said the 16 participating providers were being judged across a broad range of areas including performance, transparency and disclosure, investor experience and qualitative analysis.

"We're looking for the ones who've not only done well in the last year but also those who've consistently rewarded their investors as well,'' said Douglas.

As with last year, Morningstar will be drawing on input and observations from a team of Massey University post-graduate students in finance recruited to mystery shops the 16 providers vying for the award.

Douglas said the students' assessment would be given "meaningful" weight and consideration. He said the students were tasked with evaluating websites and content posted by providers, disclosure statements, information on funds and their performance and other education materials.

"We wanted to ensure that we had people who weren't part of the industry, who don't have their own personal biases that come from being a researcher and covering all the different managers.''

Douglas said the students were valuable to the process as they created great discussion and debate as independent observers.

The 2011 KiwiSaver fund manager of the year will be named March 1.

KiwiSaver Q&A: I opted out of KiwiSaver four years ago, now I want back in. Can I do it and get the kick-start too?

Amanda Morrall — Wed, 15 Feb 2012 00:43:44 +0000

Opting out of KiwiSaver will not prevent you from getting back in a second time if you reconsider.

According Inland Revenue, when someone opts out of KiwiSaver, it's like they've never joined so there's nothing standing in your way of coming back. If you opted out the first time, you would never have received the kick-start or paid into the retirement savings intiative as there is a stand-down period before the contributions start taking effect.

That means that yes, you'll qualify for the kick-start of $1,000 as long as it remains on offer as well as the member tax credits. I was however interested in hear the following from IRD should you get cold feet a second time. If you are starting a new job, you will be automatically enrolled in KiwiSaver. As such, you have the option of opting out provided you do it within eight weeks. You also have to wait two weeks before you can apply to opt out as well. If you're past the eight week period, you might be eligible for what's called a "late opt out"or you can apply for an "early contributions holiday."

However, and this is the interesting part to me, if you voluntarily sign up to KiwiSaver through your existing employer or through a provider, you can't opt out. So if you do elect to go this route, I would suggest you think it through carefully.

Here's a link to the Government's KiwiSaver website explaining the opt-out rules. It also contains a dowloadable form for the opt out application which is returned to your employer or Inland Revenue.

For your interest, I've also looked up the conditions under which you may be eligible for a late opt-out for a period up to three months after receiving your first contribution.

your employer didn't supply you with a KiwiSaver employee information pack (KS3) within 7 days of you starting your job
Inland Revenue didn't send you an investment statement for the default KiwiSaver scheme that you were allocated to
your employer didn't give you an investment statement for their chosen KiwiSaver scheme
events outside your control prevented you from delivering your opt-out notice on time you were automatically enrolled when you shouldn't have been.

Andrew Gawith takes a look at whether shares or bonds are likely to deliver better returns in the future. Your view?

Andrew Gawith — Tue, 07 Feb 2012 01:44:32 +0000

By Andrew Gawith

It's been a tough time for investors lately with the world's major sharemarkets struggling to produce any meaningful capital gain over the past five years.

The disappointment, though, goes deeper: since the start of this century the US sharemarket, measured by the S&P 500 Index, has fallen by 13 per cent, and that's before taking into account the erosion in value caused by inflation over that time.

In contrast to shares, world bonds have performed spectacularly well (up over 100 per cent) since 2000.

The yawning gap in returns between bonds and shares doesn't depend on the starting point being 2000 either; you have to use more than two decades worth of (US) data before you can show that shares have delivered higher returns than bonds.

It's perhaps not surprising then that investors have shifted some of their funds away from shares and into bonds.

According to data from over 40 countries compiled by the Association of US Investment Companies, investors have reduced their allocation to shares from almost 50 per cent at the end of 2006, to 39 per cent by the end of September 2011, and upped their allocation to bonds and money market investments.

In making the shift, of course, they have contributed to the downward pressure on shares prices and helped push up bonds.

The reasons

There are at least three reasons behind many of world's savers shifting from shares to bonds over the past five or more years:

The obvious one is that bonds have simply delivered better returns than shares - in hindsight the shift in funds has been a no-brainer. But could bonds turn from being a no-brainer to being a genuinely stupid investment over the next 10 years?

Another compelling reason for the shift to bonds is simply a flight to safety.

Bonds traditionally offer much greater security over the capital value of an investor's funds in exchange for a lower return than is the case for shares. Given the huge uncertainty that has dogged financial markets for much of the past five years it's small wonder that investors have withdrawn to the relative safety of bonds. As the turmoil in financial markets fades investors may be inclined to take on more risk and nudge their way back into shares.

A third reason for the shift to bonds may be more fundamental. The demographic bulge in the number of people hitting retirement is likely to see a sustained shift to more conservative investment mandates.

As this large age cohort retires their focus will be on the security of their capital rather than the returns they can get from that capital. If the financial crisis has taught us anything it is that returns that look too good to be true, too often are. For New Zealanders that message was repeated loudly by the collapse of finance companies that had lured many retired folk to invest in dubious debentures by offering unsustainably high interest rates.

The first two reasons above rely heavily on hindsight, something that investors find very difficult to shrug off. Investors are told time and again that over the long run shares will produce higher returns than bonds; the basic rationale being that shares carry more risk and therefore investors seek higher returns.

Well, as we've seen that has not been the case for the past decade or more, which raises the question: how long is the long term? For a 65-year-old, 10 years may be all the time he's got left, whereas a 25-year-old can afford to hang on for long-term relative returns to prevail - shares outperforming bonds.

The assumptions

Interestingly, a major KiwiSaver provider has argued that too many Kiwi savers will miss out on investment returns by spending the rest of their working life in the conservative funds they have been defaulted to. The argument rests on these conservative funds returning less than more aggressive share-oriented funds over the longer term.

While past returns are not necessarily a good guide to future returns, the experience of the past two decades surely tell not to make sweeping assumptions about future relative returns.

KiwiSaver members who have allowed themselves to be allocated to relatively conservative default funds have done pretty well over the past four years and it would be foolhardy for the Government, or a KiwiSaver provider for that matter, to somehow impose their conviction about future relative returns upon lethargic KiwiSaver members, or indeed presume to know what's best for individual investors.

Bond yields are historically very low in most, though certainly not all, developed economies. The scope for them to go lower and thus keep delivering the significant capital gains they have done over the past two decades or so is getting pretty slim.

Furthermore, if the liquidity central banks have been pumping into their economies finally generates economic lift-off, higher inflation is likely to follow, and that would dent future bond returns.

Essentially central banks are trying to engineer an economic recovery by lowering the returns bond investors get in favour of higher returns for businesses taking on debt to expand their business or leverage their existing business - either way cheaper credit should translate into higher share returns eventually.

It would be a pity to see investors once again driven by hindsight to desert an asset class (in this case shares) as it passes through the bottom of its returns cycle and plump for bonds as they pass through the peak of their cycle.

The shift back to shares delivering higher returns than bonds will happen - if only someone would tell us when!

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Andrew Gawith is a director of Gareth Morgan Investments. This article was first published in the NZ Herald.