Mary Holm 's Opinion

Mary Holm is a columnist for the New Zealand Herald.

Mary Holm: Laddering deposits helps reach goals

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A structured pattern of term deposits helps an executor get the best interest returns for his widowed mother

Laddering gives higher interest over longer terms as a reward for tying up your money. Photo / Thinkstock
Laddering gives higher interest over longer terms as a reward for tying up your money. Photo / Thinkstock

Q: I read with interest the question from the reader about compounding interest monthly versus yearly, as I look after my father's estate and the money off it is what my mother lives off. We have seen interest rates drop to very low levels lately and I have been forced to look at options to try to improve her income, but only through term deposits.

I came to the conclusion that I would ladder her term deposits by setting up term deposits for 3, 6 and 9 months and rolling them to 12 months fixed as they come off those terms. I came across the compounding calculators you mentioned, Mary - very helpful indeed.

Laddering the deposits gives the opportunity to take advantage of some of the better term deposit rates that are expected to come on during the next 12 months.

One thing I found when shopping around and then trying to move money across banks to get the best term deposits is that there is a shipload of paperwork banks have to do now as a result of the FMA rules brought in in the past couple of years, when anyone wants to open an account.

Opening an estate account is even worse, and I even came across one bank that was so pedantic about trustees and legal documentation that in the end I couldn't open an estate account as it was all too much trouble. I was told this was because of the FMA rules trying to prevent money laundering, catching fraudulent use of money, etc.

I surmise that the net effect of the FMA rulings and subsequent amount of paperwork required mean that banks are not interested in smaller investors.

The FMA has actually provided a barrier to people wanting to shop around with banks and open term deposits to take advantage of better interest rates. It is a shame there is no Powershop-type website where term deposits can be easily switched like power accounts.

A: Firstly laddering, then the rules.

Laddering is a great idea. You've given an example of 12-month laddering, but it can also be done over longer periods. And most of the time - except when interest rates are widely expected to fall - you get higher interest over longer terms as a reward for tying up your money for longer.

Let's say you have $100,000 to invest over a long period. You could put $20,000 in a one-year deposit, another $20,000 in a two-year deposit and so on, with the last $20,000 going into a five-year deposit. As each one matures, reinvest it for five years.

There are two advantages of laddering, as opposed to investing the lot for five years:

• You get access to some of the money every year. You never know when you might need it.

• You get a spread of interest rates. With rates going up and down over time, you don't want to tie up all the money for five years, only to see rates rise soon afterwards.

Turning to the banks' new identification rules, I sympathise. But it's something we'll have to learn to live with - although there's a way to make it easier. More on that in a minute.

You can't actually blame the Financial Markets Authority (FMA) for the new rules. And I'm not saying this just because I'm on the FMA board.

For one thing, it's the politicians who changed the law. For another, it's the Reserve Bank, not the FMA, that's responsible for overseeing the act as it applies to banks, life insurers and non-bank deposit takers. However, the FMA supervises most other financial service providers, with Internal Affairs covering casinos and a few others.

The rules result from the passage of the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act, which came into effect last June 30. Its title tells us what this is all about.

"There are compliance requirements, but as you'll see from the act's purpose, this is for a very good cause," says an FMA spokesman. "It also means New Zealand is now in step with the very high standard set by most of the developed world.

"Until relatively recently, we were regarded as an outlier, and that's not good for us in terms of attracting offshore investors and capital into our markets. Indeed many major buy-side firms have internal restrictions on investing in markets that appear on global AML 'blacklists', and New Zealand had to work very hard to get off those."

That's pretty important. What's more, we could have been seen as attractive to terrorists and money launderers because we were known as slack.

Under the act, all financial service providers must now do "customer due diligence" - making sure their customers are who they say they are, by checking documents such as a passport or a birth certificate and driver's licence.

This is done when you first become a customer, and sometimes again later. "Reporting entities don't have to do customer due diligence every time there's a new transaction (for example, setting up a new term deposit), but they do need to regularly review customer information," says the FMA spokesman.

"If your correspondent is an existing bank customer, they may not be asked to confirm their identity unless the opening of the term deposit triggers a change in the nature and purpose of the business relationship with them."

One way to make all of this simpler - in the near future if not now - is to use the Government-run RealMe to confirm your identity.

"RealMe lets New Zealanders easily and securely prove their identity online, plus access lots of online services with a single username and password," says the website.

To take part, you fill out details on the website and then go to a PostShop to set it up.

"BNZ and TSB Bank are the first two banks to provide the RealMe service," says the website. "You can now use RealMe to open a range of BNZ transactional accounts online via its website.

"TSB Bank offers the RealMe service to enable a TSB Bank account to be opened via its mobile banking app. Kiwibank is committed to providing RealMe and is actively working to implement the service later this year. Other major banks are expected to be on board during 2014."

For someone like you, interested in regularly moving money from bank to bank, this could be a big help. You might want to ask banks about their involvement.


Shopping for better returns

Q: I am 67 years old, single and retired with no intention of returning to work if I can avoid it.

I have a freehold house, $110,000 in the bank and no debts and I live on government superannuation.

I have my money in Kiwibank, which I hope is secure and a safe investment. However, the interest rate is very low. Can you suggest another safe but more profitable place to put my money?

A: One obvious option is another bank. Interest rates can vary quite widely. Check who's offering what on interest.co.nz or depositrates.co.nz. The ANZ, ASB, BNZ and Westpac actually have higher S&P credit ratings than Kiwibank, so they should be at least as safe.

If you want to venture beyond the banks, you'll have to take on a bit more risk. However, you might be comfortable investing in high-quality corporate bonds, which are still unlikely to go wrong.

I suggest you find an authorised financial adviser by looking at the Info on Advisers page on maryholm.com, and discuss this with him or her. If you go with one of the advisers listed at the bottom of that webpage, you'll have to pay a fee. But given that your situation seems quite simple, it shouldn't be too high. Ask for a fee estimate when you first make contact.

Regardless of whether you stick with bank term deposits or venture into bonds, there's probably some good news ahead in the form of somewhat higher interest rates.

One more thing: you might want to ladder your money - in term deposits or bonds - as described above.


Dual pension schemes
Q: In a recent column, you said: "If you're an employee, the only way to join KiwiSaver is via your employer."

However, as an employee I'm already involved in an occupational pension scheme and have joined KiwiSaver as a private investor. The old National Bank assured me this was impossible, but not so.

A: I should have been more explicit. An employee can indeed sign up for KiwiSaver through a provider. But I would think every provider would ask if you are an employee, and if you say yes, your KiwiSaver account would still be set up with your employer taking at least 3 per cent out of your pay. Most people would find it easier to just sign up at work.

However, it sounds as if you might have done something tricky.

As I said last week, if your employer is contributing to another super scheme for you, they won't usually contribute to KiwiSaver as well. But it's still worth joining KiwiSaver to get the $1,000 kick-start. And if you take a contributions holiday - to avoid making 3 per cent contributions - but keep putting in $1,043 a year, you will receive the maximum tax credit.

The downside is that you have to contribute 3 per cent of your pay for a year, before you're eligible for a contributions holiday. Or at least that's what I've always been told. But perhaps you've avoided this.

I asked Inland Revenue what would happen if an employee applied through a provider and said they weren't employed, or somehow avoided that question.

"A person may enrol in KiwiSaver directly with a scheme provider and not specify their employment," says an Inland Revenue spokesman. "If this information is not provided to Inland Revenue by the scheme provider then we may determine a person's employment status by what information is on an employer's monthly schedule (which includes their IRD number)."

Inland Revenue would then write to the employer. "This will advise that their employee has enrolled in KiwiSaver and they are to start making deductions from their salary or wage and make employer contributions for the employee," says the spokesman.

However, all of this depends on the employer giving correct information to Inland Revenue. There can also be complications if a person has more than one job. It seems, then, that occasionally a person can slip through the cracks.

Before anyone else tries to do this, though, I suggest you work out how much 3 per cent of your pay is. On $30,000, it's $17 a week, and on $50,000 it's $29 a week.

Is it worth mucking around to avoid contributing that for just one year?


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 suffer from following it.

Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Keep letters to about 200 words. We won't publish your name. Please provide a (pref daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.

- NZ Herald

Mary Holm

Mary Holm is a columnist for the New Zealand Herald.

Mary Holm is a columnist, best-selling author and seminar presenter on personal finance. She is also a director of the Financial Markets Authority and the Banking Ombudsman Scheme, and holds an MBA in finance. Previously she was business editor of the Auckland Sun and Auckland Star, and has worked for the NZ Listener, Australian Financial Review and Chicago Tribune. She has been called “The nation’s favourite investment agony aunt.”

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