Feeling trapped by high fees? It might be time to make your escape. Photo / Getty Images
OPINION:
Q: I am a 43-year-old single woman with no dependents. I own my home mortgage-free. I receive a supported living payment of $254 per week, with an earnings cap of $160 a week.
I have recently received an inheritance of $1.5 million.
I want to invest as much as possible and am planning to put $750,000 into a Westpac managed fund on top of the $40,000 I already have in the AMP default fund.
Earning $160 per week interest on top of the benefit is easy, but earning $414 each week ($254 plus $160) is probably more than my investments could do under current interest rates. I intend to top up my weekly income to about $900 each week by spending the principal amount.
Should I waive the benefit by investing as much as possible and collecting interest, or keep the benefit by keeping investments low and not receiving interest?
As much as I don't wish to be seen as a bludger on the benefit, if I am entitled to the benefit why not take it?
A: Sorry, but the financially optimal choice isn't really the issue. You're obliged to tell Work and Income about your inheritance, and the rest follows from there.
"Central to New Zealand's benefit system is the principle that assistance is provided based on need, and that where people have additional resources, they should use those resources to support themselves," says Kay Read of the Ministry of Social Development (MSD).
"Clients must tell us straight away about any change in their circumstances or their family's situation that may affect their entitlement to a benefit. They agree to do this when they sign the benefit application form."
If you inherit a one-off lump sum, that is generally considered a "capital payment" rather than income. "However, if periodic payments are made from the inheritance and used for an income-related purpose such as power, rates, food or clothing, they will be treated as income. If the inherited money is invested, any interest earned is treated as income."
How about putting the money into KiwiSaver, where you can't access it until you are 65?
"Depositing significant lump sum funds into KiwiSaver or other superannuation schemes may be considered deprivation of assets and/or income," says Read.
I then asked her, "if a beneficiary doesn't tell you that they have received an inheritance, how might you find out? And what happens if you do find out? Can you claim back benefits that have been paid?"
Says Read, "most people receiving financial assistance from the ministry do the right thing and tell us about changes that could affect their entitlement to it. A small number do not.
"We have a number of information sharing and data matching programmes in place with other agencies to identify changes that may affect a person's entitlement. We also receive around 8000 allegations through our public allegations line each year.
"MSD has a team of specialist investigators throughout the country, and we have an intelligence unit that supports investigations. If we confirm a client has been paid more than they are entitled to, a debt may be established."
She adds, though, "the first thing we do is reach out to the client and ask to discuss their situation with them as soon as possible. We want to make it easy for clients to do the right thing, so they don't receive further overpayments they may have to repay.
"We look to prosecute the most serious and persistent fraud."
The wise thing to do is tell MSD about your good fortune, go off the benefit, and get on with your life. Given you have a mortgage-free home, $1.5m is heaps of money for a comfortable life.
Q: I am 48 and I have been in KiwiSaver since it started. I am fortunate to now have approximately $508,000 in my KiwiSaver account. But there is one thing that doesn't quite seem fair.
Of my personal contribution of $640 per month, approximately $420 is taken away as fees, leaving a net contribution of $220.
The fund is supposedly actively managed versus passively — but it does still include a number of index tracking ETFs. As my balance continues to grow, the situation will only get worse, and at some stage all of my monthly contribution will be taken away as fees rather than growing my investment.
I am considering changing to a passive investment option whose fees are about half of what I am paying. This means much more of my contribution would be invested rather than swallowed up in fees. Your comments would be appreciated.
A: Not quite fair? It's highway robbery! If you are paying $420 a month, that's $5040 a year. What does your provider do for you that costs all that money?
This is a good example of why KiwiSaver percentage fees should be falling as people's balances and total fund balances grow. Your fees are just under 1 per cent, which sounds low, but not when it's applied to a large balance.
You've got to escape! I suggest you check out the Smart Investor tool on sorted.org.nz and move to one of the funds charging the lowest fees at your risk level. Chances are good that it will perform as well as your expensive fund, on fees perhaps below 0.5 per cent.
As you can see in our sidebar story below, the new KiwiSaver default funds are charging as little as 0.2 per cent. The Financial Markets Authority (FMA) is encouraging all providers to cut their fees on all funds.
Q: There are so many banks offering KiwiSaver schemes. Are they a better option to join as a 30-year commitment?
A: As noted in today's sidebar story, while the Government is keeping BNZ, Kiwi Wealth (linked to Kiwibank) and Westpac as default providers, ANZ and ASB are losing that status.
There's nothing special about bank KiwiSaver schemes. And I dislike the way many show members their KiwiSaver balances every time they do online banking. That can be unnecessarily disconcerting in market downturns.
All KiwiSaver providers are monitored first by their separate supervisors, and then by the FMA. I reckon your money is safe with all of them.
And the smaller non-bank providers tend to try harder with low fees and good services.
Q: I loved to see you suggesting last week that a young investor might take a bit more risk if they've got the stickability, but suggesting that it's not suitable for most people.
But I'd argue that a heck of a lot of people are doing it without even realising.
Anyone who owns shares, but still has a mortgage on their home, is essentially gearing their investments. Money is fungible (interchangeable), and there is no difference between paying down the mortgage and then borrowing to invest, versus choosing not to pay down extra on the mortgage and investing spare cashflow.
One big difference, though, is if you save up money every month and buy shares, you get no interest deduction. But if you pay down additional on your mortgage every month, then subsequently borrow some back out to buy shares, it's a deductible loan — with no timeframes or phase-outs like the rubbish laws they're writing for residential property investment.
Still, it pays to talk to an accountant to get things set up right — particularly if you're using a revolving credit or offset account as they're quite complex from a tax perspective.
A: You're quite right. If you have savings invested in shares, as well as a mortgage or other debt, you are borrowing and investing. So your situation is the same as someone who is borrowing to invest, or gearing.
Of course you will always have to make your regular mortgage payments. But what should you do with any spare money — make extra mortgage payments or invest?
To be better off investing, you need to make a higher return on the shares or share fund, after fees and tax, than the mortgage interest you are paying. The money coming in should exceed the money going out.
KiwiSaver complicates this. If you're investing in a higher-risk KiwiSaver fund that holds mainly shares, your average returns should comfortably exceed your mortgage interest rate. This is because the returns are boosted by extra input from the Government and in many cases from your employer.
But if you put extra into KiwiSaver — which won't attract any further government or employer contributions — or if you invest outside KiwiSaver, it's not as certain that you will earn more after fees and tax than your interest rate. And as mortgage rates rise, that will be increasingly true.
There's another issue here too. Paying extra off a mortgage comes with zero risk.
Investing in shares comes with the considerable risk of a prolonged market downturn.
Then there's psychology. Many people dislike being in debt, and the sooner they get rid of their mortgage the better.
For all these reasons, it's usually wiser to put any extra savings into paying down your mortgage.
But if you enjoy taking some risk, and you're in a strong financial position like our young investor last week, borrowing to buy shares can work well. And, as noted above, the interest paid is tax deductible, which effectively makes the interest rate lower.
More on this topic next week.
This Wednesday, December 1, new KiwiSaver default funds will come into effect. Unlike the plain vanilla default funds of the past, the new ones have several features likely to make many people move into them from other KiwiSaver funds.
Five providers will no longer run default funds. They are AMP, ANZ, ASB, Fisher and Mercer. Four others — BNZ, Booster, Kiwi Wealth and Westpac — will continue, and two smaller providers, Simplicity and SuperLife (run by NZX's Smartshares) will join them.
The six new default KiwiSaver funds will:
• Invest at a balanced, or medium-risk, level — a change from the current conservative level. This is because returns over the long term will almost certainly be higher, although with more ups and downs along the way.
• Charge lower percentage fees than in the past, and with no yearly admin fees. The fees are: Smartshares 0.2 per cent; Simplicity 0.3 per cent; others 0.35 to 0.4 per cent. This is down from 0.38 to 0.52 per cent plus up to $40 a year in the current default funds. The new fees are the lowest KiwiSaver fees ever. This will make a big difference to savings growth over the years.
• Not invest in fossil fuels or illegal weapons.
• Give guidance to members when they first join, are approaching retirement, after a first home withdrawal, during market volatility, and after 18 months of not contributing.
The changes to the risk level and fees mean that from age 18 to retirement, a member might expect to save an extra $143,000, the government says.
Anyone in a KiwiSaver balanced fund — which might include retirees and first home buyers planning to spend their money within three to 10 years, and longer-term investors who dislike the volatility of higher-risk funds — should consider switching to a new default fund. Along with lower fees and so on, they will be subject to more government scrutiny than other funds.
To switch, just contact the new provider. They will arrange the move for you.
What if you are currently in a default fund — probably because you didn't choose a fund when you joined KiwiSaver?
If you are with AMP, ANZ, ASB, Fisher or Mercer you will be automatically transferred to a new provider. IRD will send you an info pack. But if you want to stay with your old provider, the contact them. Don't know who your provider is? Ring 0800 KIWISAVER and have your IRD number handy.
Note that current default members' risk level will rise with the changes.
If you don't want that — perhaps because you plan to spend the money soon — tell your provider you want to stay put.
- 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.'