KiwiSaver Q&A: Should I take a KiwiSaver holiday to fast-track the mortgage or keep plugging away?

KiwiSaver Q&A: Should I take a KiwiSaver holiday to fast-track the mortgage or keep plugging away?

KiwiSaver Q&A: Should I take a KiwiSaver holiday to fast-track the mortgage or keep plugging away?

By Amanda Morrall

Q)I am in a company KiwiSaver super scheme where the company matches my contributions up to 7.5% of my salary. Hence, I contribute 7.5% each fortnight amounting to about $1,000. My money is in what I perceive to be an under-performing aggressive portfolio. I have recently taken on a $385,000 revolving credit mortgage at 5.4%. My question is would I be better off taking a KiwiSaver contributions holiday and putting that $1,000 towards the mortgage for 4-5 years.

A)You're not alone in thinking you might be better off getting the mortgage monkey off your back before you pursue other investments more seriously. While that strategy can be effective, many would argue that retirement savings deserves a front-seat in your financial plan as well.

The argument for keeping up those KiwiSaver contributions, alongside mortgage repayment, is particularly strong in your case because of the generous top-up you are receiving from your employer.

In any event, I took your question to an authorised financial adviser so you could have the benefit of an expert opinion on this one.

But first, for the benefit or other readers, lets review your circumstances: You're a 48-year-old employee in KiwiSaver. You are invested in an aggressive fund with AMP. You're making personal contributions of 7.5% of your pay on annual basis and your employer is matching you. You have a revolving credit mortgage of $365,000 with an interest rate of 5.4%.

Nigel Tate, with Nigel Tate Financial Planning Ltd in Hamilton, broke your question into two parts: 1) whether you'd be better off taking a KiwiSaver holiday and channeling that money onto the mortgage and 2) whether you are invested in the right fund.

Let's look at the first one.

You'll be well aware that most employers contribute only 2% of gross pay to KiwiSaver, so the 7.5% you are receiving from your employer is exceptional. Sacrificing those bonus investment dollars for the sake of your mortgage doesn't make sense, the way Tate sees it.

Even with employer's contributions getting taxed next year, you're still getting a huge amount of money that you presumably would not be getting if you took a KiwiSaver holiday. The other point Tate makes on the mortgage diversion option, is that you'd be increasing your risk exposure to an illiquid asset.

"Contributions to KiwiSaver with employer support at the level gained in this situation, is extremely beneficial and it is likely to be imprudent to simply focus on debt reduction at the expense of the $26,000 contributed by his employer. By diverting his contributions to his mortgage would in fact increase his overall risk exposure to illiquid assets (his property).''

He makes a good point however I would point out that many people also see KiwiSaver as an illiquid investment as well, on the ground that you can't touch it until you're 65. Okay, so technically speaking that money is more fluid because it's in equities but you get my drift. It's hands off until you throw in your hat at work in 17 years time or so.

With respect to whether you are in the right KiwiSaver fund, Tate suggests it is not so much which fund you are in that matters but the fact that you're in one at all.

"It is imperative that clients needs are met with any KiwiSaver plan and whilst at present the fact that you contribute is of far greater importance than which fund your are in as the amounts at this stage are reasonably low. The fund would need to be losing 50% per annum for the client to be losing any of his contribution in effect."

That may be cold comfort in the face of unimpressive returns on your KiwiSaver. 

Tate suggests you're probably an ideal candidate for a financial adviser, given your earning ability and income, and your proximity to retirement age. Now is the time to review your circumstances in earnest and get organised for retirement.

Part of that exercise would entail a review of your risk profile and your cash flow requirements now and going forward.

Tate suggests this would allow you set your priorities and risk tolerances to suit your needs.

It could also be you are more loss averse than risk averse, which is important to determine, he argues.

For your money, a financial adviser will give you guidance on this but how about pushing your provider for some answers too. Under the new regulatory environment in New Zealand, KiwiSaver salesmen and saleswomen are expected to be authorised financial advisers (AFA). That means they have the same qualifications as financial advisers giving personalised investment advice, or that's my read of the situation.

How about getting on the horn and asking to speak with an AFA employed by your provider. They should be able to put you through a risk profile questionnaire to determine whether you properly belong in an aggressive fund. They should also be able to explain, or at least rationalise, what's going on with the fund and why it's not doing so hot. 

Sure, they may give a big sigh or huff about being put to work on this, but remember you are paying these guys to manage your money so why not hold them to account for it?

Going back to your original question, Tate concludes that you're long-term better off maintaining your KiwiSaver contributions and if you have any spare income left-over after that, throw that onto the mortgage as well.

 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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 Why are “money matters” so difficult here in New Zealand – all sorts of strange people shovelling and juggling constantly “Kiwi investors” money from one corner into another ?

 Q - For your money, a financial adviser !!!!???? (my God) will give you guidance (cooking up what??!!) on this but how about pushing your provider (Hmmm!!!??) for some answers too. Under the new regulatory environment in New Zealand, KiwiSaver salesmen and saleswomen (what !!!???) are expected to be authorised financial advisers (AFA). (Jesus !!!!??) Q-end

Any banksters ???

 http://www.youtube.com/watch?v=Tq_lB7P0_o4&feature=related

"Hence, I contribute 7.5% each fortnight amounting to about $1,000."

Are you saying that 7.5% of your fortnightly income is $1000? This makes your fortnightly salary more than $13K and annual salary around about $350K. Wow!

If this is the case, you should have no problems wiping out the mortgage in a few years, provided you don't fritter it away on things like financial advisors :P Even so, Tate is right that you should stay in Kiwi Saver and take the free $26K per annum on offer from your employer. Add to this, pay down the loan as fast as you can with as much of the other 92.5% of your income as you can.

The stuff about the illiquid asset is nonsense. Presumably you will always have the illiquid house (or another one) regardless of the amount owing on it. Always a good idea to get the amount of debt down, though.

"Hence, I contribute 7.5% each fortnight amounting to about $1,000."

Are you saying that 7.5% of your fortnightly income is $1000? This makes your fortnightly salary more than $13K and annual salary around about $350K. Wow!

If this is the case, you should have no problems wiping out the mortgage in a few years, provided you don't fritter it away on things like financial advisors :P Even so, Tate is right that you should stay in Kiwi Saver and take the free $26K per annum on offer from your employer. Add to this, pay down the loan as fast as you can with as much of the other 92.5% of your income as you can.

The stuff about the illiquid asset is nonsense. Presumably you will always have the illiquid house (or another one) regardless of the amount owing on it. Always a good idea to get the amount of debt down, though.

Sorry to be picky, but a "company KiwiSaver Scheme" where the employer matches an employees'  7.5% contribution needs a bit more of a delve and not taken at face value.   It sounds like it might not all be a KiwiSaver scheme.    For one thing, aren't KS employee contributions meant to be 2%, 4% or 8%?   It's really unlikely that he's in a Complying Fund,  but these things need to be asked.

I think a hybrid is more likely, where the employer matches 2&2 or 4&4 into KiwiSaver - and the rest up to 7.5% goes into AMP's master trust.   This would make sense in that the member gets all the benefits of KiwiSaver (as long as he's paid over $52K a year on a 2&2 contribution)  but also has a more accessible fund in the master trust, that he can have when he leaves service.

If it isn't set up like that, then the employer really should look incredulously at whoever they get advice from.

Given the above circumstances Id agree hes better staying in but for people who don't get a 7.5% matching amount the numbers will be very different.

The comment about reducing risk in an illiquid asset is totally irelevant.  He already owns the house so is exposed to price risk on it whether theres debt or not, there is no risk of the debt fluctuating so reducing leverage reduces risk given the same return...and how many funds are matching mortgage rates on an after tax and fees basis?

Personally I won't be saving a cent for my superannuation till I'm 100% mortgage free.  The extra years that takes off my mortgage will save me far more than any super returns would over the same period.

His employer isn't going to be paying into his mortgage instead, so I see no dilemma.  

Even if he was paying 2% into KS and the employer matching it, that's +100% return right there (until April) on his investment.   Even after April, it'll be just the +70%.  Oh and the member tax credits whack on another $521 on top.   And then there will be returns on the money itself.    I would say get the most you can out of KS and put anything spare on reducing the mortgage.   It's crazy not to.  

Agree with pythagorus  - do both.

But, 5.4%  on a P & I mortgage??

Whereabouts?

Easy, pay down debt...we are heading for a depression, so clearling debt makes the most sense.....

 

regards

Well if you are in CHC , keep up your Kiwisaver..owning a house is a very risky business here at the moment.

But we had the same delima, my wife is in a scheme is $ for $, up to 7.5% of her salary, of course you would do it, schemes like this don't come around very often now. Her scheme will also let you take it out as cash after being in it for 7 years, so if you do end up in the Sh*** it is a wee safety net, unlike KS which is locked in. (We do both- me KS)

My mother had all her money in her house- she didnt do KS but put all into her house as she did not want a mortgage when she hits 65 next year, bang comes the earthquake, house gone, now a long insurance wait and we know  there will be value lost , she now wishes she had a KS for some extra cashflow when she hits retirement age.Spread your risk.

What will the retirement age be in 17 years from now?

What sort of political changes are likely to be made over the next 17 years?

Will it end up being heavily taxed cos the government is broke?

Can you be sure your KS money will be there when you eventually need it?

Will the KS money be there but much less than expected?

I say, don't think about today, think about what it may be like when you retire.

Where is that crystal ball?

Best of luck with that.