It's never too early to start investing

By MARY HOLM

Q: My Mother reads your letters and answers in the Weekend Herald and learns a lot. She suggested I write to you to ask what you think.

I am 11 years old and am in Year 7 at intermediate school. My Mum has helped me save over $600 in my savings account at the bank.

We think we could invest it in something else. Can you give me any ideas, please?

I want to use the money one day for university, or training sort of things, or maybe for when I retire.

Mum has $6500 to invest.

She's thinking of putting it into the Tower Corporation's Tortis International Fund. Would that be okay to do?

She is 44 and wants to keep it for her retirement.

A: Let's start with your Mum. (Mothers should always come first, shouldn't they?) Her choice is great for a long-term investment. The Tortis International Fund is an index fund, which means it holds the shares in a sharemarket index.

The fund managers don't need to choose which shares to buy and sell. They just follow the index. And over the years and around the world, that has proven to be as good a strategy as trying to work out which shares are good buys.

It also makes the fund cheaper to run, so fees are lower than in "active" funds, which hire experts to make the investment decisions.

In New Zealand, too, index funds have a tax advantage. Unlike active funds, they don't pay tax on their capital gains.

Overall, then, index funds work well for investors.

What's more, your Mum has chosen an international fund.

This gives her a great spread around the world, and reduces the risk of her investment.

There will still be single years, and occasionally longer periods, when your Mother's investment loses value, though.

She must be ready to accept that, and not bail out when things look grim.

She's probably got 20 or more years before retirement. If she sticks with Tortis International over that time, it's highly likely her investment will grow healthily.

What about you?

In many ways, Tortis International would be a good choice for you, too. But:

* The minimum investment in that fund is $1000.

* If you want to use the money for university or training, that's about seven years away.

It's debatable whether that's long enough for an investment in a share fund.

While there's a good chance that, over seven years, you'll get higher growth than if you stick with a bank investment, it's also quite possible that you would have been better off in the bank.

It's even possible, although highly unlikely, that your $600 could wind up worth less than $600 after seven years.

On the other hand, by investing in a share fund you'll learn lots - including what it's like to be in an investment that fluctuates.

I suggest you put some of your money in a long-term deposit at the bank.

That should pay you more interest, over seven years, than several short-term deposits. And it will certainly pay more than a savings account.

Then put the rest - $100 if you're cautious, $300 or $400 if you're brave - into a share fund.

None of the world index funds will accept such a small amount. But you can put as little as $100 into sharebroker ABN Amro Craig's START programme.

Through that, you can invest in another international index fund, AMP's WINZ, which is similar to Tortis International.

One difference is that WINZ is listed on the Stock Exchange.

That means you can look up the share price each day, to see how you're doing.

The fees on START aren't negligible. That's because the firm needs to cover the costs of dealing with lots of customers with not much money.

But, with any luck, even after paying those fees, you'll do well.

Q: In response to a reader's comment last week, you haven't lost the plot.

Don't you think it is odd that professional advisers charge their fees on the client's capital sum, not on the annual returns which their advice creates (capital gain and interest and other payments combined)?

The investor wants above-average performance, and perhaps that is how the adviser should be paid.

The banks pay 5 per cent per year, so the adviser might receive a percentage of annual returns greater than this benchmark and receive nothing if the benchmark is not met.

A: Thanks for the plot comment. Actually, I'm not sure what the plot is, but it's good to know I've still got it.

No, I don't think it is at all odd that financial advisers don't charge on the basis of the returns on their clients' investments.

That's not to say that the idea hasn't got merit.

But there are a couple of problems with it:

* In times of declining sharemarkets, an adviser would get little or no income.

I don't think many people would be prepared to be advisers if their income was so uncertain.

* Advisers would have a strong incentive to maximise clients' returns.

That might sound good. But high average returns tend to come from riskier investments.

Many clients would rather not take on much risk.

But advisers - especially the ones who themselves tolerate risk quite happily - might push their clients in that direction.

* The reverse might happen with risk-averse advisers, who want to be sure they'll get at least a certain income each year.

They might push clients towards non-volatile investments such as term deposits, even if they are not suitable for those clients.

In other words, advisers could wind up investing their clients' money according to the advisers' needs and tolerances, not the clients'.

Having said all that, I would love to see an adviser charge a relatively low fixed fee, and then a bonus that would vary according to performance.

I'm sure many clients would be happy to pay more in good years and less in bad years. Your idea of using bank interest as a benchmark is a good one.

Q: It appears that if you work in New Zealand, then retire, you become a prisoner of the New Zealand Government!

I understand the New Zealand state pension is paid only in New Zealand, whereas if, for example, you retire from Germany, you can decide to live in a lower-cost country, to enhance your lifestyle, or for any other personal reason, and still draw your pension.

I believe there are some exceptions where the NZ pension is paid - perhaps Australia?

Can you explain in which countries you can retire and still receive the New Zealand pension?

Why won't the NZ Government pay the pension any place you like? After all if you move out you remove costs like health etc.

Also, if you retire in New Zealand and have worked in another country for part of your life, the New Zealand state pension system reduces your pension directly by any amount of pension you may be due from that other country's state pension system, so far as I can understand.

Is this in fact true? Or is it only true for those countries with which New Zealand has reciprocal pension agreements? And if so, what are those countries?

A: Comparing different countries' Government pension schemes, with all their different features, isn't merely comparing apples and oranges. It's more like comparing apples and elephants.

I put your questions to Michael Littlewood, director of financial planning company Planit Services, member of the Todd Task Force on Private Provision for Retirement and writer of a book, articles and often passionate letters to publications and politicians about NZ Super.

He said it's easy to qualify for NZ Super, compared with many other countries.

You need to be 65, and to have lived in New Zealand for 10 years after age 20. And at least five of those years must be after age 50. NZ Super is usually payable in full only to New Zealand residents.

But it's not as restrictive as you seem to think. There is a small group of countries (including Canada, Denmark, Greece, Guernsey, Ireland, Jersey and the Netherlands) that have reciprocal arrangements with us.

If you have lived in New Zealand for 30 to 45 years (it varies, depending on the country), the NZ Government will pay Super to you while you live in one of those countries.

"Proportional amounts are payable for shorter periods," says Littlewood, "and you don't have to be in receipt of NZ Super before you leave New Zealand."

New Zealand also has reciprocal agreements with the UK and Australia, but they are different. "Periods of residence in New Zealand count as residence in those countries for the local benefit," he says.

And if a New Zealand resident who qualifies for NZ Super moves to the UK, she or he qualifies for a full, basic UK pension. But no NZ Super is payable directly to individuals in the UK or Australia.

While we don't have reciprocal agreements with Pacific Island countries, if you live in one of those countries, and you have previously lived in New Zealand for at least 20 years, you can receive the full NZ Super. "It's reduced for 10 to 20 years' residence in New Zealand," says Littlewood.

If you live in any other non-agreement country, and you were entitled to NZ Super before you left New Zealand, you can receive NZ Super at half rates. Is all this reasonable? Littlewood points out that NZ Super is higher than most other countries' welfare-type arrangements.

"As a taxpayer," he says, "I would generally be reluctant to help pay for a full pension of someone who is no longer living here.

"If your questioner doesn't want to live here, that's his or her choice.

"Part of the decision about living in any country includes the way it looks after its citizens in all sorts of ways, including retirement, and that's fine.

"If we are to pay the full pension to anyone who has lived here but who no longer does, then we should probably think about extending the residency period to the approximately 40 years that the UK uses for National Insurance contributions," says Littlewood.

Moving to your last point, you're right that, if you receive any other state pension, NZ Super is reduced by the amount of that pension.

"However," says Littlewood, "the other way to look at that is to say that the entitlement from the other country is topped up to the NZ Super level.

"Either way, the New Zealand resident often ends up better off than if he or she had remained in the other country."

A spokesman for the Ministry of Social Development says: "People's individual circumstances vary so much."

If they want to be certain about where they stand, "it's much better if they contact us and we get a good idea of what they intend to do, where they come from and what pensions they bring with them".

To find out more, contact International Affairs, Ministry of Social Development, PO Box 27-178, Wellington, or telephone 0800 777 117.

* Mary Holm is a freelance journalist and author of Investing Made Simple. Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@pl.net.

Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers or give financial advice outside the column.