Rising property values and shrinking families can result in some big inheritance windfalls. Photo / Getty Images
OPINION:
Q: A friend is about to receive a huge inheritance. On inspection, there seems to be no guaranteed safe place to keep the money while she is deciding how to invest. The new government guarantee of $100,000 per bank will not come into effect until next year.
What is the safest place to keep huge sums of money while you are working out your investment strategy? One financial adviser recommends splitting the sum between banks to reduce the risk.
I would like my friend to be able to sleep soundly at night knowing her money is safe. I would love to know what you think Mary.
A: Large inheritances are probably quite common these days, given the value of many houses — and especially if your parents owned more than one house.
And with smaller families than in past generations, there are often fewer heirs to share the estate with.
So what should your friend do with the money while she decides how to invest it?
Time was when people thought the safest place was under your mattress. But it was never really safe. The risk of a fire, flood, theft — or perhaps hungry rats or insects — has always been there.
The two best options for the money are:
• Deposits in several banks
As you say, the government guarantee of bank deposits up to $100,000 is not yet in place. "As it stands, the Bill is currently before Parliament and is expected to be enacted by mid-2023 and operating by late 2023," says a spokesperson for Finance Minister Grant Robertson.
In the meantime, under what's called Open Bank Resolution (OBR), if a bank fails, a portion of all accounts would be frozen. You would probably get some of that money back after things settle down, but maybe not all of it. The bank would stay open, and a "de minimus" amount in each transaction account would not be frozen, so everyone could continue their day-to-day banking.
Under either OBR or the guarantee, obviously it would be wise to spread your money over several banks, as the adviser suggested. Which banks? The Bank Financial Strength Dashboard on the Reserve Bank website, www.rbnz.govt.nz, gives you all sorts of information about the banks that operate in this country. At the top of each graph is a "What is this?" explanation of the graph.
One important measure, at the top of the dashboard, is the banks' credit ratings, which assess the likelihood a bank will get into financial trouble. These ratings are not infallible, but pretty good.
The three ratings agencies give slightly different assessments, but broadly, ANZ, ASB, BNZ, Kiwibank and Westpac are all rated strong to very strong, with other banks getting somewhat lower ratings, or not being rated at all.
• Using one or several cash funds
These funds hold bank deposits and similar investments. I wrote about KiwiSaver cash funds, and how to choose one, in last week's third Q&A. But if you are under 65 you would want a similar but non-KiwiSaver fund, so you can withdraw money at any time. You can choose one of those funds in much the same way as a KiwiSaver cash fund.
All cash funds are Portfolio Investment Entities or PIEs, which are run by fund managers including banks.
And PIEs, whether or not they are run by banks, are not subject to OBR. But if they hold deposits in a bank that fails, those deposits would be affected.
Check whether a cash fund has most of its investments with one bank, which clearly raises the OBR risk. And while you're at it, check that it doesn't also hold bonds, which would make the fund a little bit volatile. This info is on the Smart Investor tool on sorted.org.nz. Last week's Q&A tells you more about this.
With cash funds, there's always the slight risk the provider could go belly-up. But their managers are licensed by the Financial Markets Authority and they are overseen by supervisors, who are also licensed by the FMA. Also, their investments are held in custody. If the manager failed, your investments would be transferred to another provider. A loss to investors seems highly unlikely.
For more on the safety of cash funds and bank term deposits, see my May 2, 2020 column.
What would I do? I'm not worried about bank or cash fund stability. I would use a cash fund that holds a wide range of deposits. It's simpler, you can withdraw at any time, and the returns are likely to be a bit higher than in the bank.
PS. Are you really writing for your friend? Or could it be you? If so, your secret is safe with me.
Q: To the retired couple from last week with $40,000 in savings, or any other persons with a little savings who want a reasonable safe return, here's my idea.
Keep $4000 in the bank for a rainy day. Invest $6000 in a 6-month term deposit with General Finance at 3.4 per cent. Then invest another $6000 for 9 months at 4.1 per cent with compounding interest, and four more lots of $6000, for 12, 15, 18 and 24 months, at increasing interest rates.
This way, you have money earning a good rate, and you will have them mature every three months after the first six months is up, should you need the money.
I have done this with my money that I had saved up for a three-month trip to Europe in 2020 which was cancelled due to Covid. I needed somewhere to invest my funds safely until we go, now planned for 2023, and to earn interest to fight against the rising airfare and travel prices.
A: You've laddered your term deposits, in a way I described recently in this column. But you're using a finance company rather than a bank.
This gives you higher interest rates, but why are they higher? Your investment is somewhat riskier. The finance company wouldn't get any takers unless it paid more than a bank.
General Finance has a credit rating from Equifax Australasia Credit Ratings of BB- with a stable outlook. Equifax says the company has a "low to moderate" risk level. For more on this see tinyurl.com/GenFinCredit.
This compares with considerably higher ratings for New Zealand's main banks, as noted above. Your money is probably still safe, but there are no guarantees.
I hope you finally get to Europe, and have a great trip.
Another reader wrote to suggest one bank's special savings account for last week's couple. Most banks have accounts with features that suit different customers. Interest.co.nz has information about these.
Q: I do not agree it is wise for the person considering living in another area to rent before they purchase. While it seems the market will not continue to increase this year as it has, it is impossible to time the market. One should buy and sell in the same market.
The person you said last week should "definitely" rent first may end up in the unfortunate situation of being unable to purchase again. I think it would have been good for your answer to mention this risk.
A: Fair enough — although the person wouldn't be unable to purchase again if prices rose fast; she would just be unable to buy as nice a property.
Last week I did say, "While I don't believe in trying to time markets, it seems likely that this year will be a better one for sitting on the home ownership sidelines than the last couple of years have been." But perhaps I should have made your point more clearly.
The thing is, investing is often about balancing risks. You might, for example, balance the risk of the sharemarket falling against the risk of inflation eroding the value of your money in a low-risk investment.
And I think the risk of finding that a new town is not right for you, after you've bought a home there, is higher than the risk of considerable house price rises over a few months.
Don't forget that you can earn interest — albeit low — in the bank or a cash fund in the meantime.
Also, if you're moving to a different region, you're not actually buying and selling in the same market. Regional house market differences can be stark.
Weighing it all up, I still think renting first is better.
Q: Two weeks ago there was a Q&A in your column about being a millionaire. Most homeowners in New Zealand could class themselves as being a millionaire. But I read some time ago that the true definition of being a millionaire was having US$1 million net (about NZ$1.4 million) in income-producing assets.
A: I'm not sure who gets to decide about definitions. Wikipedia says, "A millionaire is an individual whose net worth or wealth is equal to or exceeds one million units of currency."
Merriam-Webster, Collins and dictionary.com all say something similar. No mention of producing income.
In any case, I would argue that your home gives you income in the form of accommodation. Economists call it imputed rent. After all, if you didn't own a home, you would have to pay rent.
Q: I totally agree with your recent advice about being open and honest about having worked overseas when applying for NZ Super.
When I applied, the person dealing with my NZ Super said my full UK state pension would be deducted from my NZ Super each month. Which it was for several years.
But here I have to thank you. Because one of your letters, a couple of years ago, revealed that if you made UK state pension contributions while living in another country, that proportion of your pension should not be deducted from your NZ Super. Work and Income did not dispute this, but it took several months for them to get my UK records, before they adjusted my NZ Super payments.
Openness should surely cut both ways. So everyone who is going to have deductions made for an overseas state pension should be made aware of this.
I feel sympathy for people who haven't had experience fighting their way through bureaucratic red tape, while resisting the temptation to start writing in capital letters.
And of course it helps to find the name and direct email (or even better, phone number) of the person dealing with it, and be very nice, patient and appreciative when you deal with them! As I'm sure you know.
A: You make a good point, that information about amounts that shouldn't be deducted from NZ Super should be prominent.
The Ministry of Social Development did note this, but more broadly, in the info they sent me. They said there's one exception to the rule that for every dollar you get from an overseas pension, your NZ Super is reduced by one dollar. The exception applies "if your overseas pension (or a portion of it) is made up of voluntary contributions, as pensions resulting from voluntary contributions aren't deducted from your New Zealand payments."
Other readers who think this might apply to them should contact MSD. And the same goes for those who have written about other issues with NZ Super.
For info on overseas entitlements and to speak to the Senior Services International team, phone 0800 777 227. For info on NZ Super and other entitlements for 65-plusers, phone 0800 552 002.
- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions 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. Send questions to mary@maryholm.com. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.
'Debt becomes more like a rent payment that people get so used to paying.'