Kiwis need to get into the habit of contributing uninterrupted for long periods of time says Summer's Martin Hawes, and KiwiSaver is the right way to do that

Kiwis need to get into the habit of contributing uninterrupted for long periods of time says Summer's Martin Hawes, and KiwiSaver is the right way to do that

By Martin Hawes*

In 1999, I wrote a book called “Save Money on your Mortgage”. In that book, I made a strong case for prioritising the repayment of your mortgage: I said that anyone who had spare cash, whether that was a lump sum or ongoing surplus, should use that money to pay off the mortgage instead of investing it.

This idea was not new, but it was not widely known, nor often adopted – there were many people who invested in various things while they had their mortgage. The book I had written, however, bought the idea to the fore and created a good bit of interest, which was useful at the time because interest rates were high and so the investment rate of return needed to be better off investing was similarly high.

During the round of publicity that is common for new books, I was interviewed by Kim Hill for Radio NZ. Hill started the interview by saying that the superannuation industry must hate me for saying that people should prioritise the mortgage and wait until the mortgage had been totally repaid before starting to invest. I think I answered this with the verbal equivalent of a shrug of the shoulders but also said that there were some exceptions to the “pay the mortgage first” rule.

One of these exceptions to the rule was employer subsidised superannuation schemes: if you are offered some free money from your employer to match your own savings, you should definitely not put extra money into the mortgage but should instead invest in the superannuation scheme and so get the employer subsidy.

That is why people should contribute to KiwiSaver to get the maximum contributions from their employers and government. KiwiSaver, with all its free money is a far better deal than repaying the mortgage.

In any event, interest rates are now very low (I have just seen a two-year rate of 2.69%). Moreover, they are likely to go lower still and will probably remain low for a long period. Low interest rates weaken that rule of paying the mortgage before investing because the investments do not need to give very high returns to beat paying off the mortgage.

For example, if you had a mortgage at an interest rate of 2.69% and decided to invest some spare money that you had, you would only need to find an investment rate of return of better than 2.69% (after fees and tax) to be as well off as paying the mortgage. Of course, you would have to take some risk to get this return, but I would expect balanced or growth KiwiSaver funds to beat this 2.69% hurdle over long periods of time.

That old rule of pay-off-debt-before-investing does not have the same force that it used to have; there is risk, but investing spare money instead of using it to repay the mortgage is now a reasonable strategy.

Recently, in a back to the future kind of way, Auckland lawyer, Vicki Pomeroy, petitioned Parliament to allow KiwiSavers personal contributions, along with employer contributions, to go to repay the mortgage. Effectively she is saying that people should take their money out of KiwiSaver and pay off the mortgage.

This sounds similar to KiwiSaver in its early days when KiwiSavers could divert a part of their savings to pay off the mortgage while still getting employer and government contributions.

In fact, in those early days of KiwiSaver, few people used mortgage diversion and it was eventually scrapped. According to Stuff, at the time mortgage diversion was scrapped, the then Revenue Minister, Peter Dunne, was quoted as saying that removing the ability to divert savings to pay the mortgage would save cost and, more importantly,  eliminate a means by which KiwiSavers could continually draw down on their retirement savings.

Dunne said, quite rightly, that an important feature of retirement savings is to lock money in so that they will continue to accumulate right through to age 65. With mortgage diversion, people can pay down a mortgage using KiwiSaver funds and then sell the house, defeating the purpose of KiwiSaver. This is effectively a way to access savings on an on-going basis.

The KiwiSaver Act is very clear that the scheme is about savings for retirement. Kiwis need to get into the habit of contributing uninterrupted for long periods of time. Those who will have the most will be those who have neither a holiday nor make a withdrawal (nor find any other clever way to get at their money).

KiwiSaver will almost always beat any other investment because of the employer and government contributions. And, for the foreseeable future at least, the investment returns on your KiwiSaver funds should beat paying off the mortgage.


*Martin Hawes is the Chair of the Summer Investment Committee. The Summer KiwiSaver Scheme is managed by Forsyth Barr Investment Management Ltd and a Product Disclosure statement is available on request. Martin is an Authorised Financial Adviser and a Disclosure Statements is available on request and free of charge at www.martinhawes.com. Martin is a Director of Lifetime Income, an Annuity provider and a Board member of the New Zealand Shareholders Association.This article is general in nature and not personalised advice. Summer competes with banks and other KiwiSaver providers.

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35 Comments

17
up

KiwiSaver is a mess. We shouldn't tax contributions, it shouldn't be voluntary, employers shouldn't be able to contract out of their contributions like they do, so effectively if I want to contribute 3% of my salary I effectively contribute 6%.
The Australian model is great. NZ should just adopt it in full and gradually phase out non means tested super.

Universal super is a safety net, sort of like a universal wage for elderly. It is simple and doing means testing will only mean that some people will structure their affairs to still get it. Also as soon as it gets complicated, costs go up.. NZ should be able to afford to pay it, and pretty sure that governments have had consultants and assessments done showing this. If people have to rely on their own retirement scheme, then we are going to end up with people making stupid decisions, like many did when the stock markets crashed, so many lost a lot of the wealth they had built-up. We are then going to endup with people who have a large nest egg at retirement, that they may just use all in one go, as they still have super to lean back on. Not unless they are going to legislate to prevent this from happening.
But I do think if people are actually doing waged work over a certain amount during retirement, then they probably shouldn't also get super during that period they are working.

It's hard to justify forced Kiwisaver contributions at in a low return/uncertainty environment when people have had to take on huge debt to buy houses thanks to some of our nest-feathering investor friends. For many, that money is better off paying down debt today than being hidden away for forty years. Let us not forget that after the boomers blow through, everything gets a lot more affordable.

No it won't, because those boomers are going to hide and protect their wealth and pass it on to their kids, aided and abetted by this non means tested super.
The boomers kids become the haves, and the have nots, who always were have nots, remain so. Still priced out of the market.

What has been the more significant factor in the shift in view on prioritising one's mortgage repayments?
A fall in interest rates or Martin Hawes becoming a KiwiSaver fund manager?

The current situation where job and income security is an issue (and there is always at risk due to a variety of factors) suggest that paying down the mortgage is being prudent.
As with most things, a prudent balance; a balance between paying the mortgage down and saving for retirement. Great KiwiSaver balances is little comfort to those currently fretting over mortgage payments.

16
up

"That old rule of pay-off-debt-before-investing does not have the same force that it used to have"
Wrong!
It's going to be crucial to have no debt, or as little as possible, as we go forward from here.
Debt, is Fixed.
The Assets; any assets, underpinning debt is 'floating', and as we head into a brand new World; one that Martin doesn't see and wants to stay stuck in the old one, Debt is going to be fatal for many.
Just ask anyone in Queenstown with a mortgage of size to pay off, and no or falling income from any source ( dividends and interest included). In a word - they are toast!

10
up

That would be Queenstown, Wanaka, Marlborough Sounds, Taupo, Rotorua, Coromandel, and Northland.

Holding a large debt is going to be advantageous, with the increased inflation reducing the real value of that debt down automatically

What if its stagflation and yes we have inflated prices but wages are stagnant? I've done a lot of reading (and youtube watching..) the last few months and quite a number are thinking a period of deflation followed by stagflation.

How would one get rid of ones private debt while unemployed or on a reduce salary while prices rise?

Inflation is years away. Just like after the GFC for the effected countries (ie NZ was barely effected by the GFC but this time, we have no such shield).

Full circle then with some people recently desperate to get access to their kiwisaver balance to clear their mortgage after job losses.

Just reduced income tax and bring in a land tax. Target all the non productive property speculation, and incent people to work and pay income tax. Add in a multiplier for those that avoid NZ resident tax by living over seas. Very simple, dosent need tons of buricrats.

Instead of wanting to penalise people who try to get ahead here is a radical idea!
How about not making it so easy for the ones who contribute very little to society, to receive welfare at the expense of the taxpayer.
I know there will be many that will attack my way of thinking, but that is because it is likely to affect them!
It is very easy to suggest things when it doesn’t affect you but when it affects you, no you can’t do that!!
There are far too many people in NZ that rely on the taxpayer and this needs to stop,

19
up

I agree 100%. We should not allow beneficiaries to use their benefits to prop up unscrupulous greedy landlords any longer.

12
up

There's that term again TM2 - 'try to get ahead'.

What are you trying to get ahead of? Other New Zealanders? Well how many New Zealanders can get ahead of other New Zealanders before that philosophy self destructs? And at what point does that culture turn into dog eat dog, or (in my opinion) has it already?

'We' are trying to stay ahead of communism. And although this is not 'your' belief, and I respect there are different beliefs than mine, there are many of us out there that believe in the hard work being rewarded principle, not the hard work gets redistributed to the lazy philosophy and the corrupt government and their families get the most benefits....(not referring to the NZ govt. just a general statement re communism).
The article above assumes you should be investing in the current equity markets that at the moment reek so much of government interference the world over that people should be opening their eyes to how much the markets can, and are being, manipulated. At present there is NOTHING about the equity markets that is self governing and in a free market situation. Are you really suggesting people should hop on board this train wreck about to happen? 38 million unemployed in the USA, Nasdaq up 4% YTD, Dow only down 5% on a year...anyone see an issue here? My suggestion..absolutely DO NOT buy into the current equity markets. Any money manager that currently says this should have their license revoked.

There are so many contradictions in this statement that if I started addressing them I would sound petty!

How will they support themselves and their families The Boy? Especially now with unemployment figures going north of 10 per cent. You show your age and your lack of education.

Your way of thinking has created great inequality for the disadvantaged and poor around the world in the last 40 years.

However "for the ones who contribute very little to society" applies very easily to property speculators, venture capitalists, greedy landlords etc. So you are right in that sense.

"I know there will be many that will attack my way of thinking, but that is because it is likely to affect them! It is very easy to suggest things when it doesn’t affect you but when it affects you, no you can’t do that!!”

The irony here is too much.

The only real advantage of Kiwisaver is the employer contribution. I have never been in Kiwisaver because I don't want to give control of my savings to any future government.
When I explain that I save for retirement myself, every employer has been only too happy to pay an extra 3% into my separate account.
I do miss out on the small government subsidy but also don't incur any fees.
The best part of self managing my retirement fund is that you can take advantage of smaller opportunities that fund managers can't. I dare say theire will be plenty of opportunities coming up as the next recession hits.
The result has been I retired much earlier than 65. And it turns out retiring while still "young" and fit brings its own opportunities. Ironically it was Martin Hawes book "20 Good Summers" that set my mind to retiring early. Having my funds tied up in a kiwisaver fund would have made that more difficult.

"The only real advantage of Kiwisaver is the employer contribution"
What employer contribution?
It's actually an Employee Contribution; all of it, as employers look at the total cost of employing any worker - the cost of wages, perks and superannuation add up to Total Remuneration Cost.
If they have to give $X away as 'their' contribution to the employees Kiwisaver, they just pay them $X much less in weekly compensation.
One way or another it's the Employee that pays.

Like I say, no employer refused when I asked. You are right it should be the employees money, but believe me most employees not in kiwisaver never get it.

Which is another 'fault' in Kiwisaver? Either everyone should 'be in' or jobs should be advertised on a Gross basis ie: Here's what we offer, say $100,000 p.a. gross - How do you want that spilt up? (NB: I'll suggest that's why there are more Sole Contractors these days. Employers give them a Gross Amount each week and it's up to the 'employee' to sort out PAYE and any other distribution of gross income)
But as long as we are half-in half-out, those who don't know to 'ask' will "pay for it" by getting less.

In my industry nearly every employer offers TREM and states it inclusive of their 3% KiwiSaver contribution. Then in your contract if you opt out of KiwiSaver, you get their 3% KiwiSaver contribution in your salary. Which has a negative effect on KiwiSaver take up, as effectively the minimum contribution rate becomes 6% of your salary.

That is the fair way to do it and I hope it becomes widespread, but it was only offered to senior management in my experience.

I personally think it's a rubbish way to do it, but that's only one small part of the problem I have with the current KiwiSaver approach

Why?

It discourages people from contributing to KiwiSaver. There are people who would join it just to ensure they got the max out of their employer (3% in this case), that incentive is now gone.
And it effectively makes the first contribution level 6%, which if you were on the fence about the whole thing and whether you could afford to contribute at 3% at that time, you're not going to start at 6% are you. Another major disincentive.
But as mentioned the overall structure of KiwiSaver is riddled with disincentives, so don't take my criticisms of this one element in a vacuum. I realise we need to fix the rest of the issues before making KiwiSaver appropriate to be a true compulsory scheme.

Kiwisaver was basically a compulsory pay rise at time introduced. Join up and we have to give you a pay rise of the employer contribution amount but you wont get it in your paycheck you get it later.

I'm guessing the following year employer went "well we had to give you the kiwisaver percentage last year so this year the payride is less." A bit of lag but employers ended up neutral.

The exception may have been where people at top of their pay rates and no prospect of raises... oh nice a bit more I didn't expect.

Are you sure they’re not paying ESCT?

The gross salary is bumped up 3% and it is taxed just like the rest of the salary.

Back in 2000 my wife and I bought our first home from a subsidiary of Fletcher Residential (Dempsey Morton). We had saved a $40,000 deposit and obtained a 25 year $225,000 mortgage with AMP.

Along with our home came your book and I read it soon after settling in. Your book was perhaps for me the most important book I have ever read. Within a few months we had increased our mortgage payments and started to make headway.

A few years later we sold and upsized to another home and a $275,000 mortgage. We paid the mortgage off in six years, got married, had kids and have saved a further $300,000 since paying it off.

The best part is I was able to use this knowledge to help a friend at work who now owns a few homes. He in turn has passed it on to his younger brother and he too has done very well.

Long story short I just wanted to offer our thanks Martin. If I hadn't read your book I would probably still be paying off my mortgage from way back when and it has really made a huge difference in my life and those of my family and friends. Thank you very much !!! I owe you one.

I get it that the government and employer contributions are great for a KiwiSaver fund but the real monetary momentum is the investment in a growth fund. This option, financially, is all over the place at the moment and it appears to be the case for a very long time. Mercer has stated recently that many of its clients will never invest again in a Growth Fund so will stay in a Conservative Fund. What does that say for KiwiSaver stake holders and associsted financial institutions going forward.

Early withdrawal of KiwiSaver funds under COVID-19

KiwiSaver is a voluntary, work-based savings scheme, designed to help people prepare for their retirement. The primary legislative objectives of KiwiSaver are to:

• encourage a long-term savings habit and asset accumulation by individuals,
• increase individuals’ well-being and financial independence, particularly in retirement.

The policy drivers for the implementation of KiwiSaver were the perceived low levels of private saving for retirement and a concern that middle-income New Zealanders, in particular, were at risk of experiencing a substantial drop in their living standards during retirement.

However, an IRD study into KiwiSaver, found evidence to suggest that KiwiSaver has not been successful in improving the accumulation of net wealth for its members and that KiwiSaver members actually accumulated less wealth compared to non-KiwiSaver members.

The IRD cost and benefit analysis also showed that each taxpayer dollar the Government spent on KiwiSaver, only resulted in additional savings ranging from 20-38 cents for the target membership.

The study also showed that the primary incentive for people joining KiwiSaver was for the employer contributions.

For those made redundant under Covid-19 and facing long term unemployment, KiwiSaver has become a luxury that is neither consistent with their reason for joining, nor their changing priorities.

This raises an important question as to whether KiwiSaver members should have early access to their funds outside of the current withdrawal criteria which are; (a) reaching the age of entitlement for government superannuation (age 65 but likely to keep increasing), (b) first home buyers, (c) financial hardship, (d) moving overseas permanently (excluding emigration to Australia) and (e) serious illness/permanent disability.

Individual’s best interests can only be served if they get the best possible return on investment applicable to any given world economic scenario. The KiwiSaver rules are currently forcing people to remain exposed to a risky share market producing negative returns or to remain with cash tied up in a fund that isn’t working for them.

KiwiSaver funds have suffered huge losses recently and those losses are unlikely to be recovered in the share market within a long term economic recession.

In the current situation, the cost of debt far exceeds investment returns, so reducing or offsetting debt is a prudent alternative to continued exposure to the volatile share market.

Other alternatives to consider are; diverting KiwiSaver funds into businesses or other investments which are safer or afford more control and liquidity. Some have been forced to retire early and they should not be forced to wait for their retirement funds. Others might wish to invest their funds to re-train or up-skill for new careers.

In summary, my belief is that for many, KiwiSaver is no longer fit for purpose in the post Covid-19 recession. The IRD study showed that even in boom times KiwiSaver was out-performed by alternative investments and that for taxpayers, the costs of KiwiSaver out-weighed the benefits. There is no incentive for those no longer enjoying employer contributions. There are many ways in which KiwiSaver funds can now be put to much better use in order to achieve the original objectives of asset accumulation, individual well-being and financial independence.

If you are interested in pursuing early withdrawal of your KiwiSaver funds outside of the current rules, then please sign my government petition at:

https://www.parliament.nz/en/pb/petitions/document/PET_97690/petition-of...

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