Wouldn't you love to manage your own retirement funds? Instead of handing them over to a KiwiSaver provider who chooses middle-of-the-road investments, you research and buy the assets, which could include individual equities and even rental properties.
That's what hundreds of thousands of Aussies and a handful of Kiwi members of Parliament and judges do. Keith Ng's expose in the Herald this week of MPs' self-managed superannuation funds (SMSFs) was an eye-opener for me - and various accountants, fund management industry people and lawyers to whom I turned for information. I didn't know we had the option of truly individualised, hands-on management of the investments in our own "superannuation" funds and KiwiSaver.
Lawyer Emma Harding of Chapman Tripp, who has set up similar self-managed funds to the ones the MPs have, explained them in simple terms. SMSFs in New Zealand are similar to family trusts, but they are registered under the Superannuation Schemes Act with the Financial Markets Authority (FMA) as superannuation investments. That's an extra layer of administration over filing returns to the Inland Revenue Department.
The main difference from a family trust, apart from the regulatory layer, is that the assets in the fund must be held until retirement - although they can be bought and sold.
Some Kiwis do still have money in superannuation schemes outside KiwiSaver. Many of those are portfolio investment entity (Pie)-compliant, which means they have a favourable tax treatment as a KiwiSaver fund. That's not the case with the MPs' schemes.
The big question is why would someone such as an MP want a superannuation scheme that wasn't KiwiSaver or Pie-compliant? If they don't get tax credits and other tax breaks, then what is the point?
There is certainly a benefit to the MPs, thanks to the loophole they've found around property disclosure and their ability to pay property allowances into their super funds.
Harding says another possible benefit would be the ability to self-manage the investments, which could include investing in a family home or other properties, and using scheme assets and employer contributions to pay down the mortgage.
In New Zealand SMSFs are a bit of a "red herring", says Geordie Hooft, a tax partner at Grant Thornton.
In Australia, higher-rate taxpayers pay 15 per cent on money invested in their SMSFs instead of a 50 per cent effective marginal tax rate, adds Joanna Doolan. That is a compelling reason to invest in them.
"There doesn't seem to be any benefit [in New Zealand] from a tax perspective," says Doolan. There is no KiwiSaver tax credit and the superannuation scheme would not qualify for Pie tax. Having an SMSF in New Zealand only works if you're super-wealthy, your employer matches your contributions and/or there are other financially valuable options such as accommodation allowances.
Having said that, anyone who really wanted to self-manage a superannuation fund could. There is no barrier, it would appear. It's just not economically viable for most of us. The cost of having a lawyer draft the paperwork could run into the thousands and there are ongoing regulatory costs each year for filing documentation to the FMA. In certain circumstances, the scheme will need to be examined by an actuary and a report lodged every three years.
What would be nice would be SMSFs that were both KiwiSaver and Pie-complaint. That way savers could choose their investments rather than being stuck with what some see as vanilla funds that all invest in much the same underlying assets.
Not everyone agrees with this. It could be argued that some of the best-performing funds are nimble and contain index-beating investments. Many Kiwis believe they can do better than fund managers - especially after management charges are deducted from KiwiSaver or superannuation funds.
"(KiwiSaver) is a managed fund with management fees and you are relying on the fund managers to ensure your investment fund will grow appropriately," says Hooft. People who have the confidence to manage their own KiwiSaver investment don't really have the opportunity - although they can hold retirement investments outside KiwiSaver.
The idea is that instead of buying into a rigid fund managed by a professional manager, you choose what investments you want to put into KiwiSaver. The money remains locked up, but the individual has greater control over how the money is invested.
The nearest we have to SMSFs is Craigs Investment Partners' kiwiSTART Select KiwiSaver, which allows investors to create their own portfolio from a list of 14 nominated funds and 77 local, Australian and global equities. Clients who want to create their own KiwiSaver funds can do so. They could, for example, invest in a mix of the Milford Active Growth Fund, Devon Alpha Fund, Auckland International Airport, BHP Billiton and Google. Or they could put all their money in Apple - providing you can prove to Craigs that the investment is suitable. "We wouldn't expect a client to have a single asset within their KiwiSaver unless it is part of a broader portfolio and they are holding other assets outside KiwiSaver," says Stephen Jonas, head of client services. You can change the composition of your portfolio at any time.
This isn't as flexible as Australia where, if they choose, investors have much more licence over choosing investments and can add properties to their SMSFs.
Accountant Matthew Gilligan of Gilligan Rowe & Associates believes SMSFs would suit many Kiwis. "I'm an advocate of self-managed superannuation and think it would be a worthy addition to New Zealand," he says.
"Why should it be the private domain of politicians and judges? Let the public in on it. It would be a very healthy addition to the superannuation landscape."
Gilligan believes an advantage would be that true SMSFs would allow people to make leveraged investments - such as property investment - within a KiwiSaver scheme. The capital grows at the same time receiving favourable tax treatment.
"With self-managed superannuation, you can leverage [under the Australian model]," says Gilligan. "So invest, say, $100,000 from your super into a property, borrow, say, 75 per cent ($300,000) and you get capital growth on $400,000, but you only invested $100,000.
"Naturally the rent would need to cover the cash costs of outgoings on the property and interest. But many people routinely do this without issue and the capital growth on $400,000 in a good area like Auckland will far outstrip the post-tax [and fund manager fee] return on $100,000 conservatively invested in most KiwiSaver schemes."
One of the risks is a property bubble and the superannuation scheme effectively collapsing because the bank calls in the mortgages. "Limiting leverage to say 67 per cent to 75 per cent of the fund should minimise this risk," says Gilligan.
A downside is that it's easier to mismanage hands-on leveraged investments such as property, whether it's inside or outside a superannuation scheme, than it is to mismanage equity and fund investments. Individuals aren't controlling the day-to-day operation of the companies they invest in, whereas they are 100 per cent responsible for the financial performance of an investment property. Providing the superannuation scheme isn't borrowing money to make leveraged share investments and it is diversifying its investments and prices fall, it will still own the shares.
New tools are being launched to help KiwiSavers choose the right fund to be in. Sorted's new Fund Finder takes the data from managers' quarterly and annual disclosure funds to help people zero in on the right fund. It compares risk, fees and past returns. The other helpful service about to be launched is Interest.co.nz's new KiwiSaver comparison tool. This, I'm told, will show more detail than other tools. It will focus on dollar returns rather than percentages and will take into account individual investors' Pie tax rates. The calculator is designed to mimic what happens to a typical fund member's KiwiSaver investment.