Mary Holm: Stop penny pinching and hit the road

A motorhome doesn't have to be a dream for a couple with savings and property. Photo / Supplied

COMMENT:

Q: We have recently retired and are both 71. We sold a property and I wish to use that money to live on. It will be approximately $35,000 a year and will take us to our late 70s.

We do have one more property that when sold will take us through another 10 years. Also, we live in a $1.4 million mortgage-free house.

But because we had always struggled and been very careful with money (due to low-paying employment — best thing we ever did was get into property) my wife is scared to spend anything. I am ready to spend — travel, motorhome!

The proceeds of our house sale are in KiwiSaver and managed funds. We have no other debt. Can you please explain that we will not get into trouble if we place $35,000 into our bank account (in two lots of $17,500 every six months).

I realise you are very busy but would ask you to answer our question as soon as possible, as my wife goes into overdraft each fortnight waiting on our pension money, rather than transferring our funds into our bank account.

A: Your last sentence worked! I hate to see someone going into overdraft — and paying interest on it — when they've got plenty of savings. Sorry to your wife, but that makes no sense.

You two are probably better off than three-quarters of all retirees. There's absolutely no reason why you shouldn't spend your savings as you've outlined.

Your letter is reminiscent of the lead letter two weeks ago, except that correspondent knows she's well off. She just can't bring herself to spend much.

Your wife seems less aware of her situation. And from some details you sent me, you're probably more comfortable than even you realise. You may not have allowed for the returns you will earn on your savings before you spend all the money.

Given your wife's concerns, I suggest you keep your savings in lower-risk KiwiSaver and other funds, so their value won't drop much. That means they won't grow fast either. But you should still get high enough returns that your spending can grow with inflation, and your savings will probably last into your 90s — when many people find NZ Super covers everything.

Is your wife still not convinced? As a back-up, you could always get a reverse mortgage later in life, or move to a less expensive house, but I doubt you'll need to.

In the meantime, do travel, get a motorhome, and have fun while you're young enough and well enough to enjoy it.

Thrifty saver

Q: I have a very dear friend, a beneficiary, aged 60, on a "supported living payment". By being extremely frugal, she is able to save about $25 a week.

She would like to open a KiwiSaver account and deposit this little nest-egg into it each week. Would Winz (Work and Income NZ) and KiwiSaver allow this? Her bank has assured her that this is perfectly legitimate but she is still not sure that it is okay.

A: Your friend is an impressive saver. The supported living payment — which is for people with a health condition, injury or disability — is just over $300 a week before tax for a single person.

Can she contribute to KiwiSaver without affecting that income?

In last week's column, I quoted a Ministry of Social Development official as saying that, generally, if a beneficiary contributed to KiwiSaver, it "would not affect their benefit unless it was income earnt through working".

But it might be different if they deposited significant lump sums into KiwiSaver — hardly $25 a week — or were applying for "hardship assistance; for example, Temporary Additional Support".

The official added, "We encourage people who have questions about their KiwiSaver contributions to give us a call and discuss their situation with us." For peace of mind, your friend might want to do that. She can call 0800 559 009 on weekdays or Saturday mornings.

As far as KiwiSaver goes, there will be no problem with her taking part. And it will be great if she does, as she'll get the government contribution each year, as well as returns on her savings.

According to Sorted's KiwiSaver savings calculator, she might have around $9000 in a low- or medium-risk fund by the time she's 65. And I bet she'll make that go far in retirement.

I have to add, though, that many beneficiaries say there's no way they can save money.

That's why the Commission for Financial Capability's recommendation — that all beneficiaries join KiwiSaver, and the Government contributes 3 per cent of their benefit while the beneficiary doesn't have to contribute anything — would really help many.

Investing overseas

Q: I'm sure I won't be the only person who has spotted last week's article headlined "$2000 tax bill a warning for investors", and would be interested in your thoughts.
I have money invested in Smartshares ETFs. Could something similar happen with other funds?

A: Not in Smartshares — which offers the only ETFs, or exchange-traded funds, in this country, says CEO Hugh Stevens.

For the benefit of others, the article was about a New Zealander who invested $6000 last year in a US-based ETF that recently went into liquidation. He got some of his money back, but had to pay $2000 in resident withholding tax.

"This issue does not affect Smartshares ETFs, as ETFs in New Zealand apply different tax rules that do not tax dividends," says Stevens. "One benefit of investing offshore through local Smartshares ETFs is that we take care of all the tax issues for investors."

He adds that if you invest directly in foreign ETFs, there are "a number of hidden costs that often vastly exceed the costs of the Smartshares ETFs. These costs are either significantly lower in a Smartshares fund or eliminated completely."

He lists the following charges:

• "Currency exchange will be charged by the NZ broker (0.50 per cent to 2 per cent)
• Foreign shares must be held by a custodian (often 0.25 per cent a year)
• Brokerage charges are higher for offshore ETFs (typically 0.6 per cent)
• A tax return must be submitted and tax is at 33 per cent (instead of 28 per cent through a Smartshares ETF, with some exceptions — this is a very complicated area!)
Stevens says that "investors going offshore also expose themselves to a number of hidden risks.

"While it is now easy to buy and sell US and other international shares at the click of a button, investors do not often consider how they will reclaim their investment if something goes wrong with the offshore investment.

"If they invest in a New Zealand-regulated product, like Smartshares ETFs, they are protected by the New Zealand regulator, the FMA, and by the full force of New Zealand law.

"If something goes wrong, our investors can call me, Public Trust, which is our supervisor, or the FMA. Imagine having to front up to a US complaints service, regulator or court to reclaim your investment."

Stevens adds that there could be an issue in future with US estate taxes. "This potential problem for New Zealanders investing directly in US ETFs has not been clearly brought to the investing public's attention. If you have more than $60,000 invested in a US listed entity and you die, your estate could be subject to 40 per cent estate tax. Investors in Smartshares are not exposed to this risk."

KiwiSaver safety

Q: Your answer — late last year — to the couple who were considering the impact of both having KiwiSaver accounts with ANZ is a little misleading.

I would agree that they don't need to consider "diversifying" across banks. However, the fact that the Reserve Bank has recently taken "further steps to strengthen [banks'] finances", as you said, isn't relevant here.

All KiwiSaver assets are held in separate custodial accounts (audited) where the assets are ring-fenced off from the custodial business. If ANZ, the bank, or even ANZ Investments, the manager, failed, they would have no recourse over those assets, and the supervisor would have the right to reappoint a different manager.

The reason I say this is there is a large proportion of the public who still believe that their assets can be "lost" by the manager. We should be educating them otherwise.

A: You're quite right. I should have thought more about the reader's question.

"Your correspondent is essentially correct," says an FMA spokesperson. "All retail schemes managed by licensed MIS [managed investment scheme] managers have their assets held by an independent custodian. This includes all KiwiSaver schemes."

But what if the custodian gets into financial trouble?

The spokesperson continues, "The scheme assets are held independently of the MIS manager (that is, KiwiSaver provider) and of the custodian itself, in other words 'ring fenced'. Any claims against the MIS manager or custodian would not affect the assets of the scheme."

Want more detail? Read on.

Savings supervisors

Q: I am considering investing funds via a managed funds provider where the money would be invested in various PIEs, and have been trying to get my head around the roles of supervisor and custodian.

I read an article you wrote which was published on October 21, 2017, in which you advised (after checking with the FMA) that all managers of KiwiSaver schemes or any other type of managed investment scheme have to ensure that a scheme's money and property are held by the independent supervisor or a custodian approved by the supervisor.

That is all very good, but how do the supervisor, the fund manager and the investor know that the custodian is not just telling porkies as David Ross was doing? I thought that maybe the supervisor would have to issue a certificate each year to state that it is satisfied with what the custodian is doing, but I understand that doesn't happen.

A: Okay, let's get this sorted.

"Under the law, supervisors are responsible for custody," says an FMA spokesperson. "As such, by default, the supervisor of the scheme is also its custodian. However, a supervisor may appoint another appropriate independent entity as custodian.

"The FMA found that most KiwiSaver funds (77 per cent) are held in custody by supervisors or a nominee company set up by the supervisor. In either case, custody of scheme money and property are held independently and for the benefit of the scheme."

What, exactly, are the different supervisor and custodian roles?

"As the title implies, a supervisor is responsible for supervising the fund manager and looking after investors' interests. They perform checks on the fund manager to ensure the manager is complying with the law and the requirements of the scheme's trust deed. If necessary, the supervisor will report any breaches to the FMA."

On the other hand, "custodians are responsible for holding and safeguarding the scheme property and for keeping records of the scheme property."

How can we know a custodian is honest?

"Supervisors are licensed by the FMA. This means they must have appropriate systems in place, their executives undergo 'fit and proper' tests, and they are subject to ongoing oversight by the FMA," says the spokesperson.

"Custodians are not licensed but are accountable to the supervisor and must provide annual assurance reports to the supervisor. These assurance reports are based on a qualified auditor's review of processes and controls of the custodian to ensure there are sufficient protections in place.

"In addition, each scheme's financial statements are audited by a qualified auditor."

Good enough for you? In the end, no regulatory system can absolutely guarantee everyone is behaving as they should. But these days New Zealand regulates financial institutions much more than it used to.

- Mary Holm 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 are personal, and 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.