For decades, energy has been a mainstay of the Taranaki economy. Photo / SNPA, Rob Tucker
OPINION:
Q: I read your column every week, agree mostly ... ! Cutting to the chase, I'm trying to find a KiwiSaver fund that still invests in oil and gas.
Why, you might ask. Well, I and the vast majority of the population of New Plymouth rely on oil and gas extraction and exploration for our livelihoods, and until the Government invests in alternative energy technology in Taranaki — as promised when oil and gas exploration licences were banned — I would like to switch my KiwiSaver investment to a fund that has my best interests at heart.
A: This is a new variation on contrarian investing — which is usually buying when others are selling, and selling when others are buying. But you want to invest in industries that many investors shun.
"We get so many queries from people wanting to avoid investments in oil and gas, but few wanting to do so," says Barry Coates, founder and CEO of the Mindful Money website, which provides information about ethical investing in KiwiSaver and other managed funds.
"Our annual surveys show that around three-quarters of Kiwis want to avoid investing in fossil fuels."
However, he adds, "most KiwiSaver funds still invest in oil and gas. Mindful Money tracks those that don't — around 19 per cent of funds now have a fossil fuel exclusions policy. This is growing rapidly, up from 2 per cent in 2019." For a list of funds with the exclusion policy, see tinyurl.com/KiwiFossil. They are the funds many readers might favour, and you could avoid.
The trend away from "unethical" investing is being boosted by the Government's direction that, from December 1, all KiwiSaver default funds are not allowed to invest in fossil fuel production or illegal weapons.
Coates suggests you might want to reconsider your choice. "The International Energy Agency says we don't need new forms of fossil fuel production. Renewable energy is increasingly going to take over, as we see with the increase in solar and wind power and the use of electricity in EVs, boilers etc.
"This is a reason why there have been warnings about high climate risk for investment in fossil fuels, along with factors such as lower investor support, government regulation and the risk of stranded assets (reserves that can never be used)."
Not convinced? What about looking after your own wealth?
"While the average US share prices (S&P500) rose by around 350 per cent over the past decade, the value of the Dow Jones Oil and Gas Index fell by around 35 per cent. That's a lot of value lost by investors," says Coates.
My tuppence worth: I can understand how you feel. But it doesn't seem that your planned investment strategy will help your situation.
Q: Good thing I sold all my investments, although at a huge loss, and am now homeless. But I have a few dollars, unlike everyone else following the disaster.
I always take my financial advice from American celebrities and my voting direction from movie stars. It's the only safe and secure way.
A: Okay, you can take your tongue out of your cheek now!
Thanks for the link you sent, which makes sense of your letter. It's to an article about how a prominent author of personal finance books predicted "the biggest crash in world history" during October.
It could still happen soon, of course, even though it would be a bit late. But probably not.
Anyway, the point I was making last week is that we should invest in such a way that it doesn't matter much — in the long haul — if the sharemarket crashes. Read on.
Q: I refer to your answer last week to the guy who questioned the idea of not investing in shares for less than 10 years. I think the answer looked at the wrong issue.
In my view the reason that you do not put money into shares that you will spend in the next 10 years is because the sharemarket may go down tomorrow and take several years to recover. You just do not want to put yourself in a position where you are forced to sell a volatile asset.
While I agree that you can get good diversification with 20 shares — and there is always an advantage in local shares with local knowledge — if the market collapses, it collapses whether you have 15 shares or 1500 shares, and that is what you are trying to protect yourself against.
A: Last week I was responding to the reader's comments about historical investment returns, rather than going into why I always recommend the 10-year rule. "Everyone already knows what I say about that," I thought.
But perhaps not. So thanks for doing a great job of explaining the rule. I particularly like your emphasis on never getting yourself into a situation in which you're forced to sell shares — or property or bonds for that matter — at a loss.
The next Q&A goes into this issue in more detail.
Q: I was surprised at last week's comments from the ex-financial adviser regarding the safe investment horizon for shares.
The question is not about whether shares provide better returns than fixed interest in most years, or over a 40-year period — of course they do. The question is in the event of a prolonged downturn, such as in 1987, 2000 and 2007, how long might it take to recover your losses if you had money invested that you needed to spend in a fixed timeframe.
Taking the 2007 crash and NZX50 Index as an example, it took approximately six years to reach break-even and eight years to achieve a return similar to that which you would have got in a fixed interest portfolio, and that assumes all dividends were reinvested.
International markets had a similar profile, as did the previous two events, and who's to say that those are the worst that the markets can throw at us? Furthermore, no amount of stock picking or diversification will save you from these mega events; indeed, the index is as diversified as you can get!
Everyone's circumstances are different, so depending on whether you have the ability to defer expenditure or stand the small chance of a loss, somewhere between seven and 10 years sounds prudent to me.
A: Well put.
Just one minor quibble. The NZX50 isn't quite as "diversified as you can get". It includes basically the 50 biggest companies on the New Zealand Stock Exchange. The SmallCap index covers the smaller companies, and it can move quite differently.
But that's not the point. I think the previous writer, you and I all agree that while wide diversification can substantially reduce risk, sharemarket crashes can still hit pretty much the whole lot at once.
Q: I'm now single and am selling my house/downsizing, as I am not that many years from retirement and very keen to be mortgage-free.
When I settle on my new home, I will still have a mortgage but it will be a lot lower.
Interest rates are so low, and I'm debating whether I should reduce my term and pay my mortgage faster or have a longer term as this will mean I have more money week to week (make life a bit easier). What do you think?
I'm also thinking I could put any savings I make into managed funds. Do you think it's okay to use my KiwiSaver provider for this? Or should I put all savings into paying off my mortgage?
A: On your first question, it depends on whether you're one of those people who are too frugal during their working years, and then have more money than they need later on.
A good way to tell is by looking at your KiwiSaver annual statement, which includes an estimate of how much you will have to spend in retirement. If you also have other savings, use the retirement calculator on sorted.org.nz.
If you seem to be too zealous a saver, it might be better to go for a longer-term mortgage so you have some fun money. But if your retirement prospects look a bit bleak, go for the shorter mortgage and get rid of that debt, so you can then get into serious saving.
On your second question, yes, I think it's okay to use the same provider for KiwiSaver and other managed fund investments — as long as you're confident you have a good, low-fee provider.
However, the only way to do better with your savings than paying off your mortgage is to make an investment that will earn you a higher return, after fees and tax, than your mortgage interest rate.
That means using a higher-risk fund, and sticking with it even through sharemarket wobbles. Could you cope with that? If it would worry you, it's best to just concentrate on getting rid of the mortgage.
Q: I pay $1200 per year into KiwiSaver at the rate of $100 per calendar month. In early January 2022, I turn 65.
If I stop payments in February 2022, will I receive the full government contribution (pro-rated to January 2022 — about $260)? Or do I have to keep making payments until, say, July 2022 to receive the $260?
A: You're correct that the maximum government contribution you can receive in the year you turn 65 is proportionate to how much of the July-to-June year you are under 65.
So if you turn 65 on January 1 — halfway through the KiwiSaver year — you would be eligible for half of the normal maximum of $521, which is about $260.
To get that, you need to contribute twice as much, which is $520. When? The Government is not fussy about when in the July-to-June year you made your contributions. You can put the money in at any time, including after you turn 65.
In your case, though, you will have contributed $600 during July to December. So you can stop in January or later and you will receive your government maximum.
Note, though, that it wouldn't matter much if you kept contributing to KiwiSaver. After you turn 65 you can withdraw the money at any time, and in the meantime it might not be a bad place to leave it.
Q: I've had KiwiSaver since 2007. I should be more on top of it, but I'm not, and I need to ask a really basic question. Here goes!
Are any of the fees that my KiwiSaver company charges me tax deductible? Here is a list. When I asked my provider they advised that I should ask an accountant.
• Contributions returned to Govt: $1163.77
• Tax corrections: $39.29
• Fees and tax: $291.59
• PIE Tax: $6574.28
A: Boo to your provider, who should do better than that at answering you.
I wasn't sure of the detail on this, so I asked an expert. He starts out by assuming your KiwiSaver fund is a PIE or portfolio investment entity. As far as I know, all KiwiSaver funds are, so we'll assume that.
The short answer to your question is that KiwiSaver fees are tax deductible, but your provider takes the deduction for you. You don't need to do anything.
"The provider will automatically attribute the taxable income to the member, and calculate and deduct the tax at the member's PIR on the taxable income attributable, less the deductible expenses," he says.
"None of the expenses of the scheme are deductible by the individual in the individual's personal tax return." He also explained the four items from your statement:
• Contributions returned to the Government result from an incorrect government contribution to you.
• Tax corrections "will be because they had the wrong PIR, and the IRD refunded/deducted the additional tax".
• Fees and tax are "most likely fees and the associated tax deductibility of the fees".
• PIE Tax "is the tax at the PIR on the net investment PIE earnings".
Sorted? I hope so.
- 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.
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