Kiwis feeling pinch on savings

While mortgage-holders are benefiting from all-time low home loan rates savers have been watching their returns dwindle.

Eight years ago Kiwis were getting close to 8.5 per cent on their money in the bank. Now it's less than half that and savers look set to be squeezed even more.

The Reserve Bank cut the official cash rate on Thursday from 3 per cent to 2.75 per cent and has signalled more cuts are likely.

While mortgage-holders are benefiting from all-time low home loan rates savers have been watching their returns dwindle.

It's a global problem which has seen share markets flooded with money over the past few years as investors seek a better return.

In New Zealand it appeared the tide was turning for savers last year when the Reserve Bank began lifting the cash rate but that has now been reversed.

Reserve Bank data shows the average six-month term deposit rate was 3.55 per cent in August - the lowest since June 1966.

And yet Kiwis have a record amount of money in the bank - $146 billion.

Major bank ASB dropped its saving interest rates by 0.25 percentage points across a range of products on Tuesday before the widely expected cash rate cut.

A six-month term deposit at the ASB will now pay only 2.75 per cent for savings of between $5000 and $9999 and 3.5 per cent for more than $10,000.

An ASB spokeswoman said the bank's rates were adjusted in line with lower market rates.

David Tripe, a banking expert with Massey University, said the official cash rate reduction meant savers could face even more pain.

But Tripe said although interest rates were hitting new lows, the saving grace for people was low inflation.

"Because we have got low inflation things are not as bad."

Inflation, or the increase in the cost of goods and services, was just 0.4 per cent last quarter.

Typically it has averaged about 2.7 per cent annually since 2000.

Tripe said that during the 1970s people with money in the bank found it even harder because inflation was higher than the interest paid on savings, meaning their money was not keeping pace with the cost of living.

Tripe said if inflation did rise it was likely the Reserve Bank would begin increasing the official cash rate again, prompting banks to also lift rates.

Grey Power treasurer Roy Reid said that in spite of the low inflation, older people were being faced with more belt-tightening with the cost of power and rates increasing.

"If they are using that [money in the bank] for additional income that will cut spending." Reid said the cuts could add up to quite a lot if people had a big sum in the bank.

Those hardest hit were typically widows or widowers trying to maintain living in their family home.

But even with rates falling Reid doubted many people would move their money from banks.

"I can't see the elderly shifting their savings too far."

A recent survey by the Commission for Financial Capability and the Financial Markets Authority found retirees most often kept their money in term deposits or savings accounts.

Gordon Noble-Campbell, director of private client services at Forsyth Barr, said for some people the only choice was to convert capital to income. For older retirees, those heading into their 80s and 90s, eating up capital was a perfectly acceptable way to maintain lifestyle, he said.

Noble-Campbell doubted many retirees would move their cash in the bank into the share market, and nor should they if they had only a small amount.

Roy Reid says older people face more belt-tightening in spite of low inflation. Photo / NZPA

"Money in the bank is not a bad thing. If it is an emergency fund you always need to have that. That doesn't matter if you are older or younger."

It was also a good place for shorter-term goals such as saving for a replacement car. "It's very important to have ready funds," he said.

"Yes, the income will be low, but it's really important to understand that capital has a particular purpose beyond generating income."

Noble-Campbell said his hope was that people would have a range of investments to support them in retirement, not just cash in the bank but also dividend-paying shares, fixed interest investments and property.

"If you are looking for a greater return there are plenty of options. But do you understand how that return is being generated?

"If you don't understand how then you need to talk to someone about it," he said.

"The rule of thumb is that higher returns have a price attached to them - to a smaller extent or larger extent."

Blair Vernon, director of advice and sales at AMP Financial Services, said one way retirees could boost their returns was to keep their KiwiSaver accounts open beyond 65 and use it to earn a higher rate of return while still being able to make regular withdrawals.

"KiwiSaver is a very cost-efficient retirement savings vehicle," Vernon said. "If they are post 65 and have KiwiSaver, they don't need to keep much in the bank."

Vernon said conservative KiwiSaver funds - those with the lowest risk level have averaged 7.9 per cent in the past year - double what money in the bank has garnered.

Morningstar figures show that over the past five years they have averaged 6.8 per cent per annum, although that kind of return is by no means guaranteed.

Volatility in the global financial markets over the past few weeks is likely to have put a dent in the returns of KiwiSaver funds.

Economic think-tank NZIER (New Zealand Institute of Economic Research) recently warned that conservative funds would likely return an annual average of only 4.6 per cent for the next seven years because of the poor performance of government bonds, which make up a large part of where conservative funds are invested.

Over the same time period NZIER estimated the 90-day bank bill rate to average 4.2 per cent.

One risk to having a low interest-rate environment is that people start to look for ways to earn more without checking out what extra risk they have to take with their money.

Vernon said that was the trap many fell into with finance companies - many of which collapsed during the fallout from the global financial crisis. "People are at risk of looking for a better return but not understanding the risk to their capital by jumping into the next you-beaut thing."

Vernon said it was vital people understood where their money was being invested. "Low interest rates create an opportunity for people to be predatory," he said. For those not in retirement, Vernon said people needed to think what they were saving for before determining where to put it.

Maximising returns

• Shop around - your bank might not be offering the best rate available. Check out interest.co.nz to compare rates.

• If you don't need instant access consider putting some on a term deposit.

• If you are saving for a house or are close to retirement consider putting the money in your KiwiSaver account in a low-risk conservative fund.

• Consider what you need the money for and whether it might be appropriate to buy some dividend-paying shares or a managed fund which pays a regular income.

• If you have a large amount of money in the bank, such as several hundred thousand, get some professional advice on where to put it to get a better return.

Less interest...so more work

Kate Burke and Hans Heumann, organisers of the Grey Lynn festival. Photo / Adrian Malloch

For Hans Heumann, lower interest rates in the bank will mean working for longer to get the moderate lifestyle he wants in retirement.

The married 63-year-old works part-time managing the Grey Lynn Festival and also runs a small retail business.

"It does make a big impact. My overall view is that I'm going to have to work as long as I can to delay the time you have to run your funds down," Heumann said.

"Anybody who looks at interest rates can see they are not going to get up for a long time," he said. "That sort of saving is gone for our generation."

But Heumann, originally from Germany, said it could be worse.

"New Zealand rates are still a lot higher than Europe or Japan or China. They have 0.1 per cent."

He is a member of KiwiSaver and is looking forward to being able to tap into that money when he turns 65.

But he still expects to continue working until he is 67 or 70.

"People are working longer because they have to prop up their pension." Tamsyn Parker