Mary Holm’s KiwiSaver advice: My fund is tanking, is it time to pull my money out?

Would an employer really “punish” a worker who wants to save more? Maybe so, but you can still make your own arrangements. Photo / 123RF

OPINION:

Q: I’m a tradie in my 40s. Like many Kiwis, I work for a smaller business. I would like to put more than the minimum 3 per cent into my KiwiSaver but know that this would be held against me at wage negotiation time. (“If you can afford 10 per cent KiwiSaver, you don’t need a big pay rise.”)

I know I can contribute to my KiwiSaver from my pay after I get it, but which way is most efficient in terms of tax? Am I better to have it taken out of my pay at 10 per cent, or stay with 3 per cent with me topping up at 7 per cent, or is the tax the same?

Or should I put 7 per cent into a non-KiwiSaver but similar fund, so I can access it before 65?

A: It seems tough that you would be “punished” for saving more. But I can imagine it could happen. So if I were you, I would make the extra savings outside the work environment.

It will make no difference taxwise.

The best way to do this is to set up an automatic transfer from your bank account to your KiwiSaver account, the day after you get paid — just to make sure the money is in there.

Not only does it keep your boss out of it, but it’s easier for you to change the amount if you need to at some point. And by the way, that change could be upwards or downwards. While the amount your employer can deduct from your pay must be 3, 4, 6, 8 or 10 per cent of your pre-tax pay, you can deposit any amount directly to your provider. That can include lump sums or regular contributions.

But hang on a minute. Your last sentence makes an important point. You can set up similar regular contributions to a non-KiwiSaver fund.

The advantage, as you say, is you can withdraw any or all of the money whenever you need to. While KiwiSaver withdrawals are permitted if you are in dire financial straits, with a non-KiwiSaver fund you can also take money out if, say, a family member is in trouble, you want to invest in your own or a relative’s new business, or you decide to move to a more expensive home.

Note, though, that if you’re a big shopper who might fritter away savings on unnecessary stuff, you might be better to lock the money away in KiwiSaver.

One more point: I’m assuming you have no debt. If you owe money on a credit card or for a car or something, repaying that should be a top priority.

What about if you have a mortgage? A year or two ago, when home loan interest rates were unusually low, it was debatable whether making extra mortgage payments was the best use of your savings.

But now that those rates have risen considerably, we’re back to the “business as usual” situation. So I think it’s better to reduce your mortgage, when you can do it without penalty, than make extra savings.

Why pay 27.89%?

Q: I recently received this message: “We wish to advise you that from 23 May 2023, the Q Mastercard Standard Interest Rate will increase from 26.69 per cent p.a. to 27.89 per cent p.a.”

It’s so important for folks not to get sucked into paying these high interest rates. I understand a lot are financially hurting now, but this is a financial death spiral.

I am lucky in that I can take advantage of the literally free money, with their up to six months deferred payment with no interest (putting what I would have otherwise paid in one month into a monthly saving account).

A: I knew that many credit cards were charging around 20 per cent interest, and more for cash advances. But I didn’t realise some are up near 30 per cent — although I suppose it’s not surprising given recent big rate rises on mortgages and so on.

If you owe $1000 and don’t repay it, at 27.89 per cent the compounded interest over a year will total $317 — almost one third of the $1000. If you don’t repay it over three years, the debt will more than double.

Please, readers, don’t borrow for anything other than buying a home if you can possibly help it. If you save first and then buy, over a lifetime you will end up way better off.

Meanwhile, our correspondent is clearly one of the clever credit card users, paying off his card debt as late as possible without interest charges, while earning interest on the money in the meantime.

This has become more worthwhile again, now that savings account interest is higher. And it’s particularly worthwhile if you have up to six months interest-free — just as long as you remember to pay in time.

I have to add that it’s no wonder people like you — the credit card winners — can get such a good deal, when the credit card losers are paying such high interest. In a way, they pay for your good fortune.

Don’t bail out

Q: I am 76, in good health, no mortgage and a couple of fixed term investments with the bank.

With my KiwiSaver (Simplicity) going down and down, should I cash in all or some of it, and put it into another fixed term investment (even if I ladder a couple of them), as the bank is currently giving 5.7 per cent for 12 months.

A: I wouldn’t do that. Since you wrote — a few weeks back now — the results for KiwiSaver funds for the first three months of this year are out.

And, as noted last week, Morningstar reports that no mainstream KiwiSaver fund reported losses in that period. Only a few small KiwiSaver funds — mainly in fixed interest, property or sectors of the share market — lost ground.

Your provider, Simplicity, actually had a particularly good quarter. It had the top performing conservative fund and came second amongst the default funds, non-default conservative funds and growth funds.

Nobody knows where the markets will go from here. But the point is that managed fund returns wobble around.

Most lost ground in the early 2020 Covid downturn but then regained it unusually fast. Since then, there has been a more sustained downturn. But over the long run, KiwiSaver and other managed funds nearly always perform better than bank deposits. And the higher-risk the fund, the bigger that difference.

Meantime, bank term deposit returns have been unusually high lately. But I wouldn’t count on those rates staying at that level for long.

I’m hoping your KiwiSaver money — and particularly any in the growth fund — is for spending some years down the track. If so, I suggest you leave it where it is.

However, if you expect to spend that money within the next 10 years, I would move it gradually to a middle- and then lower-risk fund, and finally — within about three years of spending — to a cash fund or term deposits.

Note to another reader with a similar question, who has about $2 million in managed funds: my suggestion is the same. But if you would be happier in bank term deposits, you have enough savings that even in those investments you should be able to withdraw a good monthly income for the rest of your lives.

Your children will probably inherit less, though.

Where to withdraw

Q: We invested approximately $200,000 with each of two reputable (hopefully) fund managers in July 2021. Investments are in a mix of their funds — growth, property, conservative and balanced. Some are KiwiSaver funds. The value with both dropped after Dec 2021. One dropped further and has recovered less. The other has recovered pretty much back to the July 2021 level. We are told often by advisers and commentators that taking money out when funds are down makes losses real. But we have to take about $50,000 out for some upcoming commitments. Should we take the money from Manager 1′s funds and realise a loss or from the better performing Manager 2, and miss the better gains and better management? Or just from the best or worst performing funds regardless of provider?

A: I would ignore the fact that one manager has performed better over a short period. In the next year or two, the other might do better. Big swings in performance happen all the time.

For example, Simplicity’s top-performing conservative KiwiSaver fund mentioned above was the worst performing fund in that category over the last year and three years, according to Morningstar data.

I suggest you take the money from both providers’ conservative funds. If you need more, withdraw from both balanced funds.

The performance of these lower-risk funds has been unusually poor in the last year or so, because of rapidly rising interest rates — as I’ve explained before. But they will almost certainly be recovering now.

For the future, you might want to set up your investments as explained above.

Funds with dividends

Q: Email from Greg Smith of Devon Funds: I was just reading your article in the Weekend Herald. I just wanted to make you aware that Devon Funds offers funds that do allow the distribution of dividends to investors, in addition to providing equity market exposures.

Another email from Dean Anderson of Kernel Wealth: Confirming our diversified and single sector funds pay out quarterly distributions, or you can have them reinvested.

A: Last week I wrote that there is only one provider I know of, SuperLife, that enables KiwiSaver members over 65 to have the dividends earned by their funds paid directly to them. SuperLife also offers this service in some of its non-KiwiSaver funds.

I asked other providers who also do this — in or out of KiwiSaver — to let me know. Hence the replies above.

Devon doesn’t offer KiwiSaver funds. Kernel does, but it doesn’t offer dividend payments to over-65s from those funds — although it does in its identical non-KiwiSaver funds. “So, if someone wanted dividends, they could switch from the KiwiSaver to a general investing fund and get distributions paid out,” says Anderson.

Whether or not you are in KiwiSaver, if you are over 65 and invest in a managed fund that receives dividends — in other words, it includes shares in its investments — it can work well to have those dividends paid into your bank account or cash fund.

It’s a good way of moving money to a lower-risk investment when you are within about three years of spending it. Dividends are already in cash, so moving just dividend money — as opposed to money invested in shares — into a spending account makes sense.

- 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 or click here. 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.