Mary Holm: KiwiSaver the wise owl's choice

Q. Aged 90, I've known various financial opportunities, both fortunate and disastrous. But I have never heard of any scheme such as KiwiSaver, which presents one with $1000 when joining and in addition provides a 100 per cent gift annually on whatever has been contributed to a certain limit.

Although the scheme is popular I cannot understand why the benefits are ignored by some young folk I talk to who are unjustifiably apprehensive because of costs being publicised.

Do you not agree that the benefits require stressing to encourage participation in KiwiSaver?

A. I certainly do. Some say I rave on about those benefits too much. But they are extraordinary - also including employer contributions and help with buying a first home.

I suspect your comment about costs refers to a Weekend Herald article last week about KiwiSaver fees, which started, "New Zealanders saving for their retirement could pay more than $60,000 in fees over their working life."

It gave examples of fees from the KiwiSaver fee calculator on www.sorted.org.nz in a way that might confuse readers.

In my book The Complete KiwiSaver, I say the following about that calculator: "Don't be shocked when the calculations come up with figures like $15,000 or $25,000 in fees, and percentages that might be above 10 per cent.

"That does not mean you are paying those sorts of numbers in a single year. The dollar figure in the first column is the total fees you are expected to pay over the whole period from now until when you can get your money out in retirement ... the percentage in the second column is the dollar figure as a percentage of your expected retirement total.

"Given that it incorporates payments over many years - for younger people several decades - it will be a much higher proportion of your retirement total than you would pay in a single year."

So what might a KiwiSaver member pay over a year? A typical annual fee is $25 to $50 plus a total of 0.3 per cent to 2 per cent of their balance - with riskier funds charging more than conservative funds because they cost more to run. On a balance of $10,000, that comes to $55 to $250 a year.

Because of the fixed $25 to $50 - which covers admin - the total fee will be a much higher percentage of low KiwiSaver balances in the early years than of higher balances later on.

To put it simply, KiwiSaver fees range from reasonable to highish. Before someone rushes to compare them with the non-existent fees on bank term deposits, let's look behind the scenes.

Banks allow for their admin costs and profits when setting the interest rates on term deposits. They could pay higher interest and charge a fee. Instead they simply pay what is really "after-fees" interest.

Last week's article quoted Government Actuary David Benison as saying KiwiSaver providers should look into reducing their fees.

I would love to see that happen. But even if it doesn't, KiwiSaver is such a good deal - as our correspondent points out - that the fees are not a good reason to stay away.

Oh, and congratulations on your attitude - so refreshing compared with retirees who can only complain that they have missed out on KiwiSaver. I hope you don't mind my saying that you remind me of the wise old owl advising children about saving.

Q. I assume that you saw the article about KiwiSaver fees in the Weekend Herald last week.

The reporter should not have compared the Mercer fees for its conservative fund against ASB's Global Sustainability fund. Anyone reading the article would think that ASB is expensive and Mercer is cheap, when that isn't necessarily so.

An article of this sort should have looked only at balanced funds or only at conservative funds, etc. It could have quoted the average for each group and shown the range of fees for providers within one group. What do you think?

A. I agree that the sample - chosen presumably to give an idea of the broad range - could have misled readers. So here's a fairer comparison.

* For an employee aged 25, earning $30,000 a year and contributing 2 per cent to KiwiSaver, fees until age 65 in the lowest-risk funds range from $7180 to $28,930. For the highest-risk funds they range from $13,770 to $61,190.

* If the employee is 50 and earning $60,000, fees until age 65 in the lowest-risk funds range from $1550 to $6120. For thehighest-risk funds they range from $1950 to $8910.

Interestingly, Asteron always charged the highest fee. The lowest fee was charged by SuperLife in three cases and Mercer in one case. Note the huge ranges in fees. Paying higher fees can make a big difference to your total savings, other things being equal.

Tip: Scroll down when looking at the fee calculator results, or you'll miss out on half the providers.

For more on this topic see next week's column.

Q. I have had a substantial term deposit with the BNZ for an 18-months term at 7.45 per cent. This matures on April 25.

The bank has sent me a statement showing they have deducted RWT (resident withholding tax) at 21 per cent. I questioned this because the rate was 19.5 per cent until April 1, then 21 per cent for the remaining 25 days. They told me they have been instructed by the IRD to apply the higher rate for the full term.

I phoned the IRD, and was told the bank is incorrect and no such directive was ever issued, and the new rate only applies from April. I have spoken again to the BNZ but they will not change their policy.

I have since written to the IRD and asked them for a written ruling on this. I would appreciate your opinion, because the bank's attitude seems to defy all logic.

A. Sorry to disappoint you, but the bank is right. Inland Revenue says the following: "The RWT rate is the rate that is applicable on the date interest is paid to the deposit holder.

"In the case of a term investment, it would be the rate applicable on the date of maturity when the interest is paid to the holder."

There may have been a misunderstanding in your phone conversation with Inland Revenue. That's why it's a good idea to get it in writing, as you are trying to do, or to look for information on www.ird.govt.nz.

Note - for future reference - that on some term deposits you can choose to have interest paid quarterly, six-monthly, yearly or on maturity, while with others the only option is on maturity, says a BNZ spokeswoman.

If you suspect or know that withholding rates will rise during the term of a term deposit, it's obviously better to go with quarterly interest, so that at least someof your interest is taxed at the lower rate.

If you suspect or know the rates will fall - which might be the case after the May 20 Budget - go for payment on maturity.

This time, though, I guess you've had bad luck.

It's worth noting that the bank doesn't gain anything by deducting more tax from you. It has to send all the money to Inland Revenue.

Q. I'd like to point out the obvious missing sentiment in the accountant's letter that led your last column - though ironically you do mention it in your response to a subsequent letter.

When the property is sold for a profit, the depreciation is usually clawed back by the IRD. As you say, it then has no more value than an interest-free loan.

That together with the prospect of no or low capital gains for some time make the law change seem a bit pointless. Or am I missing something?

A. Yes you are, according to John Shewan, chairman of PricewaterhouseCoopers and a member of the Tax Working Group.

He quotes Inland Revenue officials as saying that when people sell residential rentals, they put the buildings at book value and say the land has had the capital gain. So there is rarely much depreciation clawback.

Adds Shewan, "Although IR gets criticised for not chasing the issue up, it's actually often the case that it is not that hard to find a valuer to confirm that the lion's share of the gain is in fact attributable to the land not buildings."

Q. What a wonderful collection of correspondence last week! Did you really get all of those in the one week?

A. Indeed I did. People often ask if I make up readers' letters, but I'm not clever enough to dream up all the different points of view. If I were, I wouldn't be writing finance columns but novels!

Right now I have enough ammunition, in the form of heated reader letters, to start an inter-generational war - "All of these landlord tantrums are so indicative of the Baby Boomer modus operandi" - or a transtasman war - "Loved your reply (to the man threatening to move to Australia)! How often have I wished someone would say that to such whingers?"

But let's not. At least one reader would be unhappy. Read on.

Q. Mary, would you please, please restore your column to a forum for sensible financial advice and stop publishing populist rants.

A. Fair enough. Still, it seems we can't escape rental property just yet.

The flood of letters on the topic - the biggest ever to this column - keeps getting bigger.

This week, to give a few more people a say, I decided to run excerpts from some letters, as follows:

* "To all the whinging landlords, try running a retail business where your own Government gives a 12.5 per cent discount to your international competitors and is now contemplating moving it to 15 per cent ... Am I complaining? No, I'm changing my business model and getting smarter about how I operate."

* "This is coming from a young landlord starting out ... All the landlords moaning about their individual money situations gets quite annoying. They should have made contingency plans, or not taken the risk if they couldn't afford it. The risk level has changed, people, get over it! Everyone should know the saying, 'Don't put all your eggs in one basket."'

* "The person who has done badly from three rentals has ignored your constant advice to diversify. He should have one rental, some good shares (not just oneor two) and some safe deposits in morethan one bank. Then he wouldn't be so bitter."

There we go. Not a rant among them - just good common sense.

Mary Holm is a part-time university lecturer, consumer representative on the board of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.