Mary Holm: A bob each way is the safe path

Mary Holm

Q. My friend has just signed up for superannuation and told me she has invested her contributions four ways - 25 per cent conservative (cash); 25 per cent moderate (cash plus fixed interest); 25 per cent balanced (shares plus cash/fixed interest); and 25 per cent shares.

Is this the same as investing in one fund with a similar balance of allocations; for example, a balanced fund with 49 per cent income and 51 per cent growth?

Q. Basically, yes, although her total in growth assets - in her case shares, although it could also be property and sometimes other assets - is less than 50 per cent. And her total in income assets - cash and fixed interest - is more than 50 per cent. So let's say it's rather like being in one fund that holds about one-third shares and two-thirds cash and fixed interest.

It sounds as if you are wondering if your friend has overdone the idea of spreading her money around, by going north, south, east and west - assuming she had the option of a suitable balanced fund.

Perhaps so, but it's no big deal. Generally, it would be more worrying if she had erred the other way, by putting all her money in one asset type.

By investing in a wide variety of assets, she will get a smoother ride because when one goes down there's a good chance another will rise.

The exceptions:

* If your friend planned to spend the money in the next couple of years, she would probably be best to put the lot in the conservative fund. Over a short period, there's too big a chance of losing value in riskier funds.

* At the other extreme, if she doesn't expect to spend the money for several decades - and she has the stomach to stick with her investments through downturns - she would probably be best to put most of her money into growth assets. If there's a downturn, she has time to recover, and she's highly likely to end up with a fair bit more.

Let's say, though, that neither applies to your friend, and that her total asset mix is right for her. Is she better off than if she were in a single fund with a similar asset mix?

Yes and no. If her four funds have different fund managers, and one manager commits fraud or is inefficient, she'll be glad she hasn't got all her money with that manager.

On the downside, if she gets reports of how each fund has performed, she might become unduly worried when, for example, the share fund performs badly for a while. If she were in a single fund, that would be watered down, and it might make life easier.

Also, she might be paying higher fees than if she were in a single mixed fund. Beyond these issues, though, it probably doesn't matter much either way.

Q. Following on from one of the questions last week, I will be endeavouring to get my KiwiSaver contributions to $1043 a year to get the maximum tax credit.

I work and have KiwiSaver contributions taken out of my pay, but will probably not quite get there with my payroll deducted contributions.

But when I'm calculating how much voluntary contribution to make to take me to $1043, when is a contribution counted as a contribution - when it leaves my pay, when it's sent to IRD later the next month, or when IRD transfer it to my KiwiSaver provider?

A. None of the above. If you are an employee and want to make extra contributions to KiwiSaver, you need to send the money directly yourself, not via your work.

There are two ways to do it:

* Deposit the money directly with your provider. All providers will accept regular extra contributions - perhaps as transfers from your bank account if that suits you - and most will also accept one-off payments. Ring or email your provider and ask how to do this. It should be straightforward.

* Send it via Inland Revenue, in the same way as if you were paying tax - except that the money will still be yours!

You can make a deposit over the counter at a Westpac bank, or mail in a cheque with your IRD number on the back and a letter saying the money is for your KiwiSaver account, or you can use internet banking.

On the internet, use the "pay tax" option, put "KSS" for the tax type, and zero for the period.

On timing, if you are using the first option, I would get the money in there by mid-June, in case it takes the provider a short while to deposit it. If you use the second option, Inland Revenue says payments to the department "can be made up until June 30 inclusive. If the payment is on June 30, we will credit it as at that date."

But I wouldn't get too worried about the optimal time to pay the money in, or how much to put in. Err on the side of too much too early. If you put in more than is needed to get the full tax credit, it's still all your money. And it will earn a return in KiwiSaver that could well be more than you are getting in the bank.

KiwiSaver survey

There are too many KiwiSaver providers, according to the readers who answered my recent survey when they entered the draw to win copies of my new book, The Complete KiwiSaver.

Almost 30 per cent of readers who have not - or not yet - joined KiwiSaver said it was too hard to select a provider or a fund. "The choice of providers, their different schemes and funds is totally overwhelming. I just cannot make up my mind," one reader commented.

"Too many providers" was also a frequent "dislike" of those who have joined - which made me wish we could send copies of my book to all 242 entrants, because it's full of information on what providers offer and how to choose one.

The second most common "why not?" reason, from 28 per cent of the 77 who are not in KiwiSaver, was that they are short of money.

This is disappointing given that non-employees can join and never contribute anything, and employees must contribute for only one year - and less if they suffer financial hardship. Still, 18 per cent commented that they may join now that the minimum employee contribution has dropped from 4 per cent of pay to 2 per cent.

Another common dislike of non-joiners is the tie-up of KiwiSaver money until NZ Super age. Many may not realise at least some of the money can be withdrawn to buy a first home, if you leave New Zealand permanently, or if you strike financial hardship or serious illness.

Some would like more lenience in this. But I'm not sure that the Government would take kindly to the suggestion from one reader that there should be easier access to the money "during times of need, for example, a wedding, a year's OE, etc".

The fourth most common reason for not joining is that the reader is in another good scheme at work. One reader said his employer contributes 10 per cent of his pay. Wow! And several said they can get money out of those schemes earlier than KiwiSaver.

"I'm not clear on how people like myself who already belong to a scheme will benefit" from joining KiwiSaver, said one person. "We keep being told to consult our 'financial adviser' but I don't have one and don't want to."

I can understand his reluctance, given the quality of advice coming from some quarters. "The scheme I'm in is really good so I don't see any benefit in changing," said a personal banker, apparently oblivious to the fact she could join KiwiSaver as well.

While her employer probably won't contribute to both schemes, it's still financially smart to join and contribute to KiwiSaver for at least a year - to get the $1000 kick-start and first-year tax credits - before perhaps taking a contributions holiday.

Next on the list of reasons for not joining was "too little time" or "inertia". "I just seem to find more important things to spend my money on, am a lazy investor and kind of relying on an inheritance to live on when I'm retired," said one reader.

Others plan to join - when they get around to it. "If we join we know we always somehow manage. (For heaven's sake, I talked my adult children into joining and they contribute every pay day without fail!)"

Then came a group who said they thought it was better to repay their mortgage or other debt than join KiwiSaver. Commented one reader: "Our financial adviser said if we pay off our home the returns will be higher than in KiwiSaver."

Again, the advice from a so-called expert is worrying. Because of the KiwiSaver incentives, the only circumstances in which repaying a mortgage is at all likely to beat KiwiSaver apply to some young non-employees. And even then, they will be better off if they join the scheme and contribute for a year, to get the kick-start.

Other reasons for not joining KiwiSaver included concerns about the lack of a government guarantee and frequent government changes, and lack of information for the self-employed and non-employees.

Surprisingly few of those not in KiwiSaver said they hadn't joined because of recent poor performance or government cutbacks to the scheme.

Complaints about those issues were far more common from readers already in KiwiSaver, who collectively had quite a long list of gripes. We'll look into those in the next column.

Meantime, a couple of readers' comments on KiwiSaver from a broader perspective.

* "In the bigger scheme of things the majority of the million members are probably middle income. Sure hope that it doesn't contribute to increased disparity of wealth." Me too.

* "I think KiwiSaver is a waste of government scarce resources and makes no difference to total saving in New Zealand. Real saving equals net income minus consumption. No one will change their consumption to invest in it. In reality it competes with other avenues of saving and is simply a taxpayer handout. Worst feature is it supports the parasitic investment adviser industry."

There's probably some truth in what you say, which is why I question whether KiwiSaver is good policy. But from the individual's point of view, you might as well be in the scheme to get your share.

Your comment on advisers is a bit off the mark, though.

I don't think KiwiSaver "supports" many advisers. Indeed, some complain that there is too little in it for them - which is perhaps why they don't know as much about it as they should.

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. 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.