Mary Holm: The lowdown on high-risk KiwiSaver funds

In every KiwiSaver scheme but one, the funds hold a large number of investments, and they're not all going to crash and burn at the same time. Photo / iStock

Q: I am currently contributing 8 per cent of my wage into a high-risk/return KiwiSaver fund via ANZ. I am happy with the interest rate on this at present, as it is returning a very high rate (approximately $1,200 per six to seven weeks.)

I have a friend who works in payroll and they have stated that I could lose all my KiwiSaver fund if this investment crashed. My understanding is that I can't lose what I have paid into my fund or interest earned?

I also have a term investment with ANZ earning 4.9 per cent — which is due to mature late this year, of which I will put the interest earned back into my KiwiSaver. Can I split my KiwiSaver fund into two parts, one high risk and the other medium risk?

A: It's always a worry when somebody gains credibility on a financial issue because they work in payroll — or in any money-related job — when they don't understand what they're talking about.

Neither your friend nor you are correct.

I think it's fair to say that — with one exception — nobody's KiwiSaver account could fall to zero. We could perhaps come up with some extraordinary scenario involving fraud, but given the checks and balances on KiwiSaver, I just can't see anyone losing the lot.

The only exception is Craigs Investment Partners' KiwiSaver scheme. Through that, you can invest in certain individual shares, so you could put all your money into one or a few shares in companies that go belly up.

But in every other KiwiSaver scheme, the funds hold a large number of investments, and they're not all going to crash and burn at the same time.

On the other hand, there's absolutely no guarantee about how much your account balance could fall — contrary to what many people think.

The high returns you've been earning are largely the result of several years of growth in both New Zealand and international share markets. But your fund isn't labelled high-risk for nothing. Any KiwiSaver — or other — investment that earns high returns will at times also suffer losses. And the recent volatility in world share markets is likely to cause a drop in your balance.

Over the long term, the rises always outnumber the falls. But you must be prepared to stick with the fund — not switch to a lower-risk fund — when the going gets tough.

If you switch at a low point you cement in your losses. But if you hang in there, you'll ride upwards with the gains that will inevitably follow. We don't know when the markets will rise again. It might even take a few years. But they always do in the end.

On your second question, all the major providers let members invest in more than one of their KiwiSaver funds.

Some people put half their contributions in a high risk fund and half in lower risk. They say the lower-risk fund is for their own contributions and the high-risk one is for money from their employer and the government.

The idea is that the high-risk fund holds money they wouldn't have had if they weren't in KiwiSaver. So they're prepared to "gamble" a little with it, riding out the downturns. If they do that over a decade or more, chances are good that their high-risk investment will end up worth more.

KiwiSaver assets

Q: We would like to put a lump sum into my KiwiSaver, but what would happen to my savings if I die? Would my wife be able to access the fund?

We have a will that leaves all the assets to the surviving spouse. Is this enough?

A: When you die — before or after retirement age — your KiwiSaver money is part of your estate and available to your heirs at that time. And yes, your will should take care of this.

One note of caution: By putting extra money into KiwiSaver, note that you tie it up until you reach NZ Super age.

Super is paid from taxes

Q: Your column last week states, "It's true, though, that NZ Super is paid from current taxes, not money that superannuitants contributed earlier in their lives.

"However, many retirees would argue that their taxes over the years went towards superannuitants then, and now it's their turn. NZ Super, they would say, is not a benefit but an entitlement."

Surely all NZ Super is not paid from current taxes. There must be some income from funds invested over the years? How does KiwiSaver work with NZ Super and means-testing?

A: Here's the word straight from the horse's mouth: "We can confirm that NZ Super is paid from current taxes," says a Treasury spokesperson. There's no fund providing input at this stage.

The spokesperson adds, though, "At some point in the years to come, the New Zealand Superannuation Fund will also help pay some of the future cost of providing superannuation."

He's referring to the big pool of money — nearly $30 billion — sometimes called the Cullen Fund. The government contributed to it from 2003 to 2009 and is scheduled to start contributing again from 2020/21. From about 2031/32, withdrawals from the fund are expected to contribute towards baby boomers' NZ Super.

On your question about KiwiSaver, it's quite separate from NZ Super. Neither is means tested, although it's always possible that a future government will decide to means test NZ Super. That could result in those with KiwiSaver — or any other retirement savings — receiving less. But I'm sure the government would set it up so those people are still better off, in total, than people with no savings.

Q: With regard to us not paying towards our pension, when I started work we paid 20 per cent Social Security tax. Rob Muldoon decided to combine it with general tax to use on Think Big projects, but we still kept paying the same tax rates.

So I believe we have always paid towards our pensions. The government doesn't give us anything we are not entitled to.

I have been on the pension for 12 months now. After paying rent I have nothing left. When I queried the amount I received I got told, "Cancel all insurances, and go back to work."

A: It depends how you define "paying towards your own pensions". Says the Treasury spokesperson, "Other than the compulsory contributory superannuation scheme established in 1975 and repealed in 1976, the cost of public pensions has always been met by general and/or various forms of 'earmarked' taxes.

"In that regard taxpayers can be said to pay towards 'our pensions' in a collective sense, but the tax an individual pays doesn't specifically go towards their individual pension.

"People interested in how the funding of pensions has changed over the years may wish to read David Preston's 'Retirement Income in New Zealand: the historical context'."

Meanwhile, that's disappointing that your NZ Super doesn't stretch as far as you had hoped. Have you checked whether you're eligible for extra payments for things like housing or health costs? See tinyurl.com/nzsuperextra.

Failing that, a return to work — at least part time — might work well for you. On insurances, do cancel life insurance if nobody else is counting on you to support them. But I wouldn't rush to cancel insurance on contents and a car - or a home if you had one — although you might reduce premiums by shopping around and increasing excesses.

For the guidance of others approaching retirement, after-tax NZ Super for those in the lowest tax bracket is currently $749 a fortnight if you're single living alone, and $1,152 a fortnight for a married couple if both qualify.

After-tax payments are obviously lower if you're in a higher tax bracket. For those in the top bracket, singles living alone get $578 a fortnight and married couples get $875.

Q: I certainly don't agree with your philosophy Mary, that people should perhaps take pride in leaving more money to help others who haven't bothered.

My father was in a rest home for two-and-a-half years. Almost all his hard-earned savings had gone by the time he passed away.

In contrast, his neighbour in the room opposite had been in the same rest home for 11 years. Because she had always lived in a subsidised state house, and never saved a penny, all the government took was her pension, apart from the required spending money.

I see this scenario as my father's and other prudent people's tax paying for another's irresponsibility.

To add to this indignity, my father was a very conscientious citizen who gave generously to worthy charities all his working life.

A: Your father sounds like a good man, and it must have been hard to watch his savings dwindle.

These days, someone in residential care can still keep considerable savings when the government chips in, but that wasn't always the case, and maybe you're talking about some time ago.

It's hard to know what's fair. If someone loses a lot of their savings in retirement because they need major maintenance on their home, or a family member needs support, or they're the victim of a swindler, the government doesn't step in. Should it when they can afford rest home care?

Comparing your Dad's situation with that of the woman opposite is also tricky stuff. She might have been irresponsible, but she might have struggled all her life with bad health, poor support or just plain bad luck. As I said last week, I wouldn't like to see the government probing deeply into people's lives to establish who "deserves" help.

If my suggestion about pride doesn't work for you, would it help to consider that your father probably had a more satisfying life than his rest home neighbour?

Many people feel guilty about spending their own hard-earned money in old age. Photo / iStock

Q: I've been following your column and celebrating the discussion on enjoying wealth.

I have often wondered that many senior New Zealanders who have lived through hard times find it very difficult to recognise their mortality and allow themselves to enjoy the benefits of their frugal lifestyle before it is too late.

My husband, as an authorised financial adviser, often finds himself encouraging senior clients to take the long awaited overseas holiday or buy the new car, almost giving them permission to spend their own money.

Often these seniors feel it is their responsibility to pass on an inheritance, yet their children enjoy a much more secure financial status then their parents could have ever imagined.

My father is a case in point. He is now 92 and has several hundred thousand in the bank but no ability to enjoy it due to ill health. Yet only a decade ago, he could have easily travelled back to his country of origin, if only he could have given himself the permission to do so.

A: The original couple who I encouraged to spend more of their savings recently wrote to thank me. "In other words," the man wrote, "as my grandmother used to say 'There's no pockets in coffins'." Well put.

• Mary Holm is a freelance journalist, member of the FMA board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.

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