Q: KiwiSaver default funds invest conservatively. I listened to the CEO of the Financial Services Council (FSC) on TV3 talking about an insurance option to protect the loss of KiwiSaver amounts due to a recession, as happened a few years ago. The cost, depending on your KiwiSaver mix, was $1.24 to $2.12 per week.
Should such a recession happen again, then the KiwiSaver loss to a 65-year-old or those saving for a house deposit would be catastrophic.
Does this insurance cover have any merit? Or maybe 65-year-olds should move their savings into term deposits, which obviously have the time restriction on the withdrawal of funds.
A: There's more than one way to pat a cat. Peter Neilson of the FSC acknowledges there are other strategies for people in riskier KiwiSaver funds to protect themselves against a big drop in their balance right before they withdraw their money.
The obvious one is to gradually shift their money as they approach the withdrawal time into a low-risk fund or — for those over 65 who are free to invest their KiwiSaver money anywhere — perhaps into term deposits.
However, the FSC is concerned about the almost half million people who are in KiwiSaver default funds, which all invest conservatively. The FSC — and I and others — would rather see them in higher-risk funds unless they are close to retirement age. Riskier funds have higher average long-term returns, and over 30 or 40 years that can make a difference of $100,000 to $200,000 or more to their savings total.
The problem with this is that those in default funds don't usually take much interest in how their KiwiSaver money is invested. They're therefore unlikely to move to lower risk funds as they approach a first home purchase or retirement spending.
One way around this is what the FSC is proposing — that people in default funds pay a small insurance premium to guard against their KiwiSaver balance dropping within three years of buying a first home or within one year of retiring.
Another way would be to automatically reduce default investors' risk as they get nearer to spending time. Some non-default KiwiSaver funds — often called life stage funds or similar — include this feature.
Which is better? With the FSC plan, default KiwiSavers stay longer in higher-risk funds with higher average returns. This, the FSC argues, would probably more than offset the insurance costs.
The same might be true for non-default members too. It would depend partly on what an insurance company chose to charge, as nobody is yet offering such insurance. It's an idea worth thinking about.
An eye on car values
Q: I believe Clive Matthew-Wilson was wrong, in your column last week, regarding depreciation of cars. I've been watching the car market on certain models for about two years (knowing a car was about to die), and the claim of 40 per cent depreciation in the first year is clearly not true for main Toyota models, Mazda-2, -3, and CX-5.
We recently bought a new Corolla for about $2,000 more than an 18-month-old vehicle. Hardly 40 per cent depreciation. And as I said, I've been looking at 1 to 2-year-old cars in Auckland for two years.
A: Perhaps the 18-month-old car was overpriced, says Clive Matthew-Wilson, editor of the car review website dogandlemon.com.
"True market value is determined by what a buyer is prepared to pay. Quite clearly, this buyer, like most other sane people, was not prepared to pay a near-new price for a used vehicle. This doesn't alter the basic equation that cars typically depreciate about 40 per cent in the first year," says Matthew-Wilson.
"For example, a 2013 Toyota Corolla GLX Hatchback 1.8 petrol was priced new at $37,490. The valuation computer at Turners Auctions (which draws its data from actual auction prices), values this same car, with 20,000-30,000km on the odometer, at $20,064 to $24,508, depending on the condition. Remember, this car will still have two or so years of factory warranty on it."
He adds that dealer prices tend to be about 30 per cent higher than many private sales and auction prices. "The private sellers who try and charge the same as dealer prices tend to be either dreamers or backyard car salesmen.
"At auction, provided the auction house is honest, cars generally sell for about what they're worth. The above example is a case in point. Given that the car in question was still a relatively new car and still under warranty, why on earth would anyone buy from a dealer at an inflated price? Also, given that this vehicle has devalued by around 40 per cent in its first year, as predicted, why would you buy new?"
Boring but sensible
Q: Maybe your readers will be interested in what I do about buying cars.
I am in my 70s and drive a "boring" Toyota Corolla — my fourth Corolla. I buy them at around 50,000 km and sell at around 130,000 km, so I normally get around eight years of fairly cheap motoring.
As long as you replace the oil at the correct intervals, the only other items that need replacing are the tyres and battery. The fuel economy is good also. If they are looked after, they are easy to sell and it is not too much extra to buy the next one.
A: Says our expert, Clive Matthew-Wilson: "This makes perfect sense".
Overseas pension ...
Q: Regarding NZ Super for people who have worked overseas, now I'm confused. The Work and Income website says: "Generally, you will get paid the same amount as those who have lived all their lives in New Zealand. This amount may be made up of a combination of your New Zealand and overseas benefit or pension payments."
You say in last week's column: "I do feel sorry for people who don't realise the situation until they're about to retire, and find their expected retirement income slashed."
I worked in the UK before becoming a New Zealand resident. Because of my age my UK pension age is 66 so I expected to receive full entitlement to NZ Super at 65.
A: I was referring to people who thought they would get the full NZ Super plus their overseas government pension, and find out at retirement that's not the case. They'll get the same as other New Zealanders, but had expected more.
In your case, you should receive the full NZ Super at 65 — assuming that's still the age that Super starts. Then, as you approach the age at which you could get the UK pension, our government will ask you to apply for that. And if you get it, that amount will be deducted from your NZ Super.
... and your spouse
Q: Re: overseas pensions, it may be reasonable that someone who has worked in more than one country should only receive the equivalent to NZ Super, but the Social Security Act also applies to spouses whether they have worked overseas or not.
I receive a part pension from the UK (£30 [$59.62] a week). Six months ago my wife (63 and never worked in the UK), received a letter from Winz telling her that as I was getting a UK pension she had to apply for one, and that any money she got from UK Pensions would be taken out of my NZ Super.
She applied and was granted a £17 a week UK pension. She now has to declare that and pay tax on it.
On top of this my wife, who has a part-time job, can no longer claim the Independent Earner Tax Credit of $520 a year because she "gets" an overseas pension.
So UK Pensions pays my wife money which is then deducted from me. That money is taxed at my wife's rate, and she loses the tax credit.
We recently discovered that my wife could have asked UK Pensions to start her pension payments on her 65th birthday, and she could then have had her pension at no disruption to my NZ Super, no extra tax hassles and not losing the $520 tax credit while she worked until her 65th birthday.
The letter from Winz didn't say that the UK pension payments could be deferred to a later date.
Maybe you could advise your readers in a similar situation that if a spouse takes a UK pension before their 65th birthday it will lead to lots of paperwork and cost them financially.
A: Gosh. It's not just a question of what countries you've worked in, but also where your spouse has worked.
The Ministry of Social Development won't discuss individual cases, but a spokesperson confirms that, "Under the UK pension programme, a woman may be entitled to the UK pension based solely on their husband's contributions."
But she adds, "The ministry would usually only ask that they apply for this type of entitlement after receiving notification from the United Kingdom Pension Service suggesting that we test the spouse's possible entitlement."
If the woman is over 65, the UK pension will be deducted from her NZ Super. If she's under 65 but her husband is getting NZ Super — as in your case — her UK pension will be deducted from the husband's NZ Super. The same thing applies to other overseas pensions received by the spouse or partner of someone getting NZ Super.
So far, so reasonable. But tax isn't taken into account.
"The legislation requires that we deduct what a person is entitled to receive, which has been interpreted to mean their gross rate. More specifically, the Social Security (Overseas Pension Deduction) Regulations require that the ministry deduct the rate of the overseas pension before income tax (if any)," says the spokeswoman.
That doesn't seem fair, particularly in your situation where you lose the $520 tax credit. Don't blame the officials, who must follow the law, but the politicians who make the law. You might want to lobby for it to be changed.
What about the possibility of a wife's deferring her pension until 65?
Under UK law, says the spokeswoman, women born before 6 April 1950 are entitled to a pension from age 60, and men from age 65. However, at 60 a woman can, instead, defer their entitlement for five years and receive a higher weekly amount from 65. Or they can get the deferred amount as a lump sum at 65.
However, your wife couldn't have made use of those options.
"Section 69G of the Social Security Act is clear that both a client and their partner must take all reasonable steps to claim an overseas pension they may be entitled to," says the spokeswoman. "This means that regardless of whether the UK allows claims to be deferred, if a person may be entitled to a UK pension they are required to claim it if they and/or their partner are in receipt of NZ Superannuation (or any other benefit)."
• Mary Holm is a freelance journalist, 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 suffer from following it.
Send questions to firstname.lastname@example.org or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.