Q: A few weeks ago, your column discussed some of the changes the Financial Services Council wants to make to KiwiSaver (removing the tax credit and cutting Pie tax rates). I'm surprised no one has picked up on the other big change the FSC advocates - to make it compulsory for people to spend part of their KiwiSaver funds on purchasing an annuity at retirement.
I would think that, for many people, this would skew the odds away from KiwiSaver and towards rental property - or even towards non-KiwiSaver Pies, both of which allow us to spend our retirement savings how we think best.
Personally, I find even knowing that the FSC may be lobbying for compulsory annuities is a bit off-putting, though of course I'm still going to put in the $1,042.
A: Firstly, for the benefit of others, an annuity is like a pension. You pay a lump sum, and receive a regular payment - possibly rising to take inflation into account - until you die.
It's like insurance against outliving your savings. If you die soon after starting an annuity, it's bad news. If you live long enough to get the telegram from the Queen - if she still does that - it's great news.
A couple of decades ago, about 10 companies offered annuities in New Zealand. Now nobody does, for various reasons. But I still find that when I explain the concept to people, a lot wish there was such a product - as long as the regular payments are reasonable.
The Financial Services Council is not the only one to suggest that a portion of everyone's KiwiSaver savings should go into an annuity. The idea is usually to discourage people from blowing all their KiwiSaver savings soon after they retire. That makes sense, although I reckon the vast majority of retirees wouldn't squander their savings anyway.
There's another issue here, too. It's one thing for a government to change the KiwiSaver tax credit or contribution level. You can take a contributions holiday if you don't like the new rules. But it's another thing to change the rules on how KiwiSaver savings can be spent. People have joined the scheme thinking they'll have flexibility in their retirement spending, and I don't think it's fair to change that.
What I would like to see is an opt-out system, like what happens when a new employee is put into KiwiSaver but can withdraw in a few weeks. When you reach 65 - or whenever you can start withdrawing KiwiSaver money - you could be told that half your money will go into an annuity in three months' time, unless you say you don't want that.
That would introduce people to the annuity concept, and I bet many would stay in. But those who have other plans - probably including people who don't expect to live long and therefore wouldn't receive many annuity payments - could opt out.
The government would have to either set up an annuity scheme or assist private companies to do so. How about that as an election issue?
Meanwhile, I agree that you should keep contributing to KiwiSaver. Just because an organisation lobbies for something doesn't mean it will happen.
The only way I can picture a government making KiwiSaver annuities compulsory would be if they set up a new scheme that we'll call "KiwiSaver 2". Under this idea, the current KiwiSaver - call it KiwiSaver 1 - would stop receiving contributions, but accounts would still grow and you could do what you want with that money in retirement.
Meanwhile, KiwiSaver 2 would start under new rules, which could include compulsory annuities. Anyone who didn't like that deal could opt out and save elsewhere. That would be fair to all.
The power of leverage
Q: I was just reading last week's column. With respect to the first question, it was a good read and a good piece of educational information for the unaware/uneducated person with regards to leverage.
I was wondering why you only focused on "stage one" leverage with the property? An investor with basic property investment knowledge would take advantage of leveraging off the property they bought at perhaps year four or five by buying another investment property.
Therefore over a 10-year period there will be a duplicated leveraging effect, and wealth will grow phenomenally as all four properties increase in value compared to share investment. A good investor may have four-plus houses over the course of 10 years and their net worth will be far greater than the $450,000 you stated in the article.
I have been investing in property for almost six years from the age of 19 and I already own three Auckland properties (in the process of buying two more) and one Tauranga property.
My best investment was a $23,000 property that was undervalued. Six months later I bought another property by leveraging off the first property. Within 24 months, this $23,000 has turned into $210,000 worth of equity. This is the true power of leverage in the property world and, sadly, not many people know about this.
A: It's true that it's easier to use the equity in one property to borrow to buy another property than it is to do the same with shares - although either is possible.
But I hope you read closely last week's bit about how, when things go wrong, leverage makes it worse. You've been in the market mainly through a period of property price growth. When prices fall - and there are always times when that happens - it's often the highly leveraged investor like you who crashes. I suggest you slow down and build up a bit more equity in your properties.
See the next letter for a couple of examples of things that can go wrong with investment property.
Q: Having read the recent letters on shares versus property, and the aggressive tone of a couple of your readers, I want to come out on your side. It does seem to me that some property investors have a singularly one-eyed opinion of their chosen choice of investment, and I do wonder if their attacks on share investors mask a form of insecurity that maybe they have made the wrong choice?
I invest in both property and shares, and use gearing in both cases to maximise my returns. The rent I receive covers my mortgage payments, and the dividends I receive cover my margin loan interest. My returns are tax-free in both cases as I never sell my properties or shares, I just buy and hold, and buy direct shares as well as index linked shares like Smartshares.
I stopped buying properties many years ago because of the hassle. Currently I have a leaking apartment that requires $120,000 of repair work, and because it is on leasehold land the ground rent increases have destroyed its value as an investment. My other property doesn't leak, but last year needed repainting ($4,000), plus a new dishwasher, this year I had a massive tree removed ($3,000), and soon it will need recarpeting.
It is true that some shares end up worth nothing - I owned Feltex - and I completely missed out on Xero. But overall with a balanced portfolio of about 100 New Zealand and Aussie shares I have made good returns over the years.
What is interesting is that most of the people I knew who were property investors have now got out of the market, and some are now in the sharemarket, having joined the share club that I set up to give my friends a chance to learn about the sharemarket.
Our share club was started five years ago and we have put in a total of $130,000 (about $2,000 a month is invested). We have been investing right through the global financial crises and now find ourselves with a portfolio worth $165,000. Hardly speculative gambling.
A: It's good to get the perspective of someone familiar with both property and shares.
Your share club's net returns look to be more than 9 per cent a year. Well done.
• Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. 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 experience from following it. Send questions to email@example.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Include a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.