Mary Holm: No need to be paranoid about banks

Instead of putting your money in a bank safe, it's better to have it in a bank term deposit. Photo / Thinkstock

I have spoken to several people who are withdrawing their money from banks (mostly to put into property) in anticipation of the end of the bank guarantees in a few weeks.

I have $260,000 from the sale of my house and planned on leaving it on term deposit while I look for a new property to buy. However, I am concerned that maybe I should withdraw the cash and keep it in a bank safe (ironically!) until I need it for the next purchase.

Is this a sensible train of thought or am I overreacting to nay-sayers?

You're not only overreacting to nay-sayers, but overreacting to badly misinformed nay-sayers.

First, banks haven't been covered by the Retail Deposit Guarantee Scheme since October 12 last year. The scheme was extended through to the end of this year, but on tougher terms, and only a handful of building societies, finance companies and the like have taken part in the extended scheme.

Second, withdrawing your money from a New Zealand bank because it's not covered by a government guarantee looks like paranoia to me. Even at the height of the global financial crisis, when the guarantee scheme started, experts told us our banks looked pretty safe. Now that the crisis is over, the chances of a bank failure seem extremely remote.

The major banks all have rock-solid credit ratings. For example, Standard & Poor's has given AA ratings ("very strong") to ANZ National, ASB, BNZ and Westpac. And Kiwibank's rating is AA minus, just a little weaker. If that's not good enough for you, Rabobank has a AAA rating ("extremely strong").

To see the Reserve Bank's list of all New Zealand bank credit ratings, go to www.tinyurl.com/NZbankratings.

The ratings follow an analysis of each bank's financial situation. Standard & Poor's has occasionally got it wrong in the past, but not often.

Another point is that you've got to consider the alternatives. I suppose a bank safe might be less vulnerable than a bank term deposit in that the physical cash will be in the safe. But you'll miss out on interest. And what if there's an earthquake and the safe cracks open? That's highly unlikely, but so is a major bank's failure.

Storing the cash anywhere else leaves you open to theft and fire.

Ignore what you've heard and leave your money in a bank term deposit. That's clearly the best place to park money for relatively short periods.

Spreading risk

I am 53 and my wife is 47. We both have a balanced-fund KiwiSaver scheme with the ASB Bank.

I keep wondering whether we should both be with the same provider or whether I should transfer my wife's contributions to another scheme? Being risk-averse, it would probably only mean moving to another one of the big four Australian banks.

Am I worrying needlessly or should I spread our risk?

As stated above, the big banks seem highly unlikely to get into financial trouble.

However, it's not a bad idea for family members to go with different KiwiSaver providers.

That way you can compare fees, communication, flexibility - and perhaps move if one provider seems clearly better.

Lifetimes option

I have been in KiwiSaver since it started, and recently turned 65. I was surprised to receive a letter from my provider - SIL - to say it had switched my funds from conservative to a cash fund.

I phoned the company, to be told the change was from a "risky" fund to a "safer" one. I could go back to the conservative fund but any further change would "be difficult".

I am mystified. Is there no choice any more? I intend to keep contributing, but do you have an explanation? I am sure the cash fund will not give such a good return.

Your letter mystified me, too. There definitely is choice in KiwiSaver. And providers can't change your investments unless you ask them to.

It turns out, though, that you did ask them - by signing up for SIL's Lifetimes option. Under that option, younger people invest in riskier growth investments but the money is transferred to lower-risk funds as you get older, with the transfers taking place at certain birthdays.

"As the investor had reached the final milestone for the Lifetimes option of age 65, the member's interest in the scheme transitioned from the SIL Conservative Fund to the SIL Cash Fund, and the investor was informed about that switch," says David Boyle, general manager, funds management at OnePath, the manager of the SIL KiwiSaver scheme.

"In all other cases, the only way a member can switch funds is by completing and signing a Switch Form."

If you decide you don't want to continue with the Lifetimes option, you can switch to another SIL fund - or for that matter another provider's fund - whenever you want to.

In further correspondence to me, you said: "I must have requested the Lifetimes option at the outset although I wasn't aware of the changes in store. Maybe it needs our attention being drawn to it. I can't see the Lifetimes name on any of my available correspondence."

Boyle's response: "We write to our members when they select the Lifetimes option, informing them they have been placed within the relevant fund for their age. When they move through a pre-determined age milestone we also send a letter to confirm that a switch has been made."

He adds, though, that as a result of recent reviews, "both our online and written correspondence will contain more regular reminders to investors of their decision to select the Lifetimes option, and what this means for them."

Boyle concludes: "I'm pleased to say with your help we have contacted this investor directly to follow up on their queries and ensure they have all the relevant information for their investment in the scheme."

And from you came this email: "Last week I received a call from a very helpful rep from One Path. We had a good dialogue re my concerns and I was very satisfied with the outcome. Thanks for all your help."

What can everyone learn from this? For KiwiSaver members, know what you are signing up for. If it's all too hard, ring or email your provider for more info, or ask somebody else knowledgeable. For KiwiSaver providers, communication can always be improved.

By the way, SIL is not the only provider offering a KiwiSaver option under which risk is reduced as the member gets older. Other "set and forget" options are:

* AMP - Lifesteps.

* ANZ, OnePath KiwiSaver, and The National Bank - Lifetimes Option.

* Aon - four Russell Lifepoints Funds.

* Civic - Automatic Fund.

* Staples Rodway - Not a specific fund, but if you tick a box on the application form the provider will move your money to the appropriate fund as you get older.

* SuperLife - AIM Age Steps.

Generally, I like these options. They make life simple, and tend to steer people into investments that suit their time-frames.

Because of this, some experts have suggested that KiwiSaver default funds invest in this way.

There are, though, a few worries about that.

Younger people in higher-risk investments might not cope with seeing their account balances plunge sometimes. Also, younger people who plan to withdraw KiwiSaver money to buy a first home haven't got a long-term investment horizon and would be better to choose a lower-risk fund.

A third concern is relevant to our correspondent. Just because you have reached 65 doesn't necessarily mean you want a low-risk fund, particularly if you have not yet retired or have other savings to fund the start of your retirement.

If you don't plan to spend your KiwiSaver money for several years, you might want to switch out of Lifetimes into a middle-risk fund.

Gold in a bubble

I have just been reading your last column, and wanted to say please don't stop the good work you are doing. I know you're likely get a lot of "individuals" disagreeing with you, but please don't ever feel you need to soften your positions based on those people's comments.

I am 27 and have been investing since I was 15, and I absolutely think that gold, as you say, is in the middle of a bubble. The last thing this country needs is a mass of retired or older people investing their savings into gold because they think it's a safe investment.

History tells us otherwise. Once the world economy gets back on track (which it will, the only question is when), we will see a massive drop in the value of gold. Why? Because it has no use other than as a safe-haven value store, unlike other precious metals that have practical uses. And once risk in the world markets reduces and stability returns, cash will flow back to more versatile assets.

As a young New Zealander struggling with this country's lack of investment appetite outside of property, I think that if you could use your column to encourage investment in innovative small to medium high-tech NZ businesses (as part of a wider diversified portfolio where low-risk assets were included), you would be helping build New Zealand's economic future.

Too often such companies are neglected as not being a credible investment. If only we could all realise that these companies are the growth engines of the economy and the creators of wealth and jobs.

I hesitated to publish your letter, as I don't want to reignite the gold debate. But it seems fair to run one anti-gold letter, as we've had two pro-gold ones lately. Let's stop after this.

I also wanted to air your point about investing in small new companies, although I would add that they don't have to be high-tech.

Such investments are risky, as many new companies fail. But a fund that holds shares in lots of new companies would be much less risky. There's a good chance at least some of the companies will grow hugely, more than making up for the failures. And, as you say, investors can water down their risk by also holding lower-risk assets.

Unfortunately, it's not easy for ordinary New Zealanders to invest in such a fund.

It would be great if somebody set one up, perhaps opening it to KiwiSaver investors.

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 best-selling author on personal finance. Her website is www.maryholm.com. Her 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. 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.