Mary Holm: Forget picking property market

I have a property in Mangere Bridge and one in Whangamata. Both have CVs of $280,000. Which one do you think it wisest to hold on to?

I have driven my family and friends mad with this question, so hope you can shed some light on the best option.

Choices! We think we like to have options, but sometimes life would be simpler if we didn't.

I suggest you forget about trying to forecast the property market and hang on to the property you want to keep - perhaps for convenience or simply because you like it better.

This is not just because money isn't everything. Nobody knows where property values will grow faster anyway.

People will have their theories - you can't go wrong with coastal property, or you can't go wrong in a suburb that's taking on new life. And they'll point to past trends to prove their argument.

But just as with other investments, the past is a poor guide to the future. Unforeseen things happen to property markets.

Toxins are discovered in the soil, or a new motorway divides the neighbourhood, or a gang moves into the area, or rising petrol prices make more remote places less attractive, or a new principal doesn't run the local high school as well as the predecessor.

In the very places where property values have grown fastest, it might simply be that prices have become ridiculous and the bubble bursts.

In shares, bonds or managed funds, you can have a bob each way, spreading your money so that at least some will be wherever the high growth turns out to be. But that's tricky with property.

So pick your favourite place - or toss a coin for it. Sell the other property, and give your family and friends some peace. Oh, and no looking back later at what's happened to prices in the area where you sold. In the course of a lifetime, you win some and lose some.

I have recently changed from a cash fund to 50 per cent balanced and 50 per cent growth in my teachers' retirement scheme, only to discover I have taken a big hit immediately. I lost approximately $800 over just a few days, from a $22,000 sum.

Is this to be expected? Should I panic and change back to cash?

Yes it is to be expected. And no, you probably shouldn't switch back.

A balanced fund in a retirement scheme - whether KiwiSaver or another scheme - invests about half to two-thirds of its money in shares and often also some property, with the rest lower risk. A growth fund invests almost entirely in shares and property. So the bulk of your savings are now in those two assets.

Shares and property tend to have the fastest growth over the long term, but the tradeoff is a rocky ride, as you've already experienced. And losses are hard to take early on, before you've made any gains. But it won't always be downhill, as our next Q&A shows.

The key to whether you should switch back to cash is how long it will be until you spend the money. If it's more than 10 years, it's best to stay put, as your account will probably grow considerably faster than a cash fund.

But if it's less than 10 years, there's a fair chance you'll strike bad luck and do worse than in cash. In that case, I suggest you gradually move back to at least the balanced fund. And once you are within a couple of years of spending, gradually move back to cash.

I thought your readers might be interested in this little experience of mine with share funds. In February 2008 I put my grandma's inheritance into Smartshares, half each in Mozy - medium Australian shares; and Ozzy - large Australian shares.

At one stage my share funds were down over 30 per cent each, making an unrealised loss of $15,000. But since then - and unreported by the press - they've made up roughly two-thirds of the lost ground, not counting whatever dividends that have been reinvested.

I plan to keep this untouched for 30 years until I retire. I have no doubt that it will be worth a lot more than I paid, as I've effectively bought a slice of Australia's economy.

A 30 per cent loss so early on is nasty stuff. Good on you for hanging in there. I like your spirit.

Your comment about recent sharemarket growth being unreported is a little exaggerated, but not much has been said until the last few days. The Australian market is not the only one that has turned around. Sharemarkets in New Zealand, the UK, US and elsewhere have all regained a third to a half of their recent losses.

Who knows what's around the next corner? But I'm sure you're right about the long term. In 2039 you'll be toasting Grandma for getting you started on an investment that has grown very nicely, thank you.

With the latest changes to KiwiSaver that were implemented on April 1, 2009, I was advised by my employer that all contributions made to KiwiSaver after that date would effectively be paid for by myself.

My employer is paying the KiwiSaver employer's contributions as part of total remuneration.

I have a mortgage and can now no longer see a benefit in making the savings into KiwiSaver. So I will be, most probably, going on a permanent KiwiSaver payments holiday. Can you advise if there are any benefits to me in remaining in KiwiSaver?

Yes, there are a couple - and they're worth getting.

First, let's explain total remuneration to other readers. An employer who uses it might say to employees, "I'll give you a 3 per cent increase in the upcoming year, but 2 per cent of that is tagged as a KiwiSaver allowance.

If you're in KiwiSaver - or you later join - you will get the allowance in the form of my KiwiSaver employer contribution. If you don't join KiwiSaver - or you are on a contributions holiday - you can instead take the 2 per cent allowance as cash in your regular pay."

If an employer takes on a new employee on a total remuneration basis, and the employee joins KiwiSaver or is already a member, the employer will make their 2 per cent contribution and the employee's take-home pay will be reduced by that amount.

In a total remuneration situation, KiwiSaver employees don't seem to benefit from employer contributions any more than their non-KiwiSaver workmates.

The employer pays the same to both - but in two different forms. In a way, as you say, it's as if you've paid the employer contribution yourself, by forgoing the money in the hand.

You do, however, receive a considerable advantage. Your employer's 2 per cent contribution is not taxed, and nor is the ACC levy taken out of it.

You keep the lot in your KiwiSaver account, while your non-KiwiSaver workmates receive only the after-tax, after-levy amount. This makes quite a difference, especially for higher-paid people who pay more tax.

What's more, you'll get the member tax credit - matching your contributions up to $1043 a year.

By the time you consider the tax credit and the tax break, you will almost certainly be better off in the long run continuing to contribute to KiwiSaver compared with repaying your mortgage - or investing elsewhere.

Note, though, that your best strategy will probably be to put only 2 per cent of your pay into KiwiSaver - with a top-up, if necessary, to get to $1043 a year. This will get you all the KiwiSaver benefits. You should put any further saving into mortgage repayment.

We have encountered a problem with KiwiSaver that we think could mean the potential downfall of the system as intended.

My partner works at a South Island ski field each year as a ski instructor. She is enrolled in KiwiSaver. Each year she is re-employed with a new contract and base pay rate. This year her contract specifically said that for any KiwiSaver member their rate of pay would be reduced 2 per cent to cover the employer contribution.

On investigation it appears that any employer can now contract out of their contribution and place it back on the employee.

The result is she pays both employer and employee contributions.

It would be reasonable to assume that more and more employers will employ people on this basis because they can.

She has emailed the Revenue Minister to discover if this is the intention of the KiwiSaver changes.

Are you aware of this loophole and potential destroyer of the basic principle of KiwiSaver that an employee contribution will have a matching employer contribution?

Yes, I am aware of it, and it is allowed - as stated in the previous Q&A.

The rules on this have been changed several times, but that's where they currently rest.

"There are a number of reasons why the Government has eventually supported the total remuneration option," says Geoff Bevan, a senior employment specialist with Chapman Tripp.

"The theory is that it promotes freedom of choice and fairness - employers are paying the same amount of money to both KiwiSaver and non-KiwiSaver contributors.

"It also means employers can pay the highest wages or salary possible, knowing that they're not going to have to fork out more if the employee joins the scheme. If total remuneration wasn't allowed, employers may pay everybody a bit less, so that they have enough to meet the cost of the employer contribution.

"Total remuneration is therefore better for those who aren't contributing to KiwiSaver. On the other hand, you're right - a total remuneration approach reduces the employee's incentive to join KiwiSaver."

Bevan says he doesn't have any hard evidence, "but at this stage it's clear that only a minority of employers are taking a total remuneration approach. You're probably right though - over time this group is likely to increase, although to what extent I don't know. It will take a major shift, though, for total remuneration to become the norm, and at the moment this doesn't look likely."

That may not be much comfort to your partner.

But, as noted above, there are still good reasons for her to stick with KiwiSaver.

Mary Holm is a seminar presenter, part-time university lecturer 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.
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