Changes to KiwiSaver conditions are at the whim of future governments
Last week you offered sound advice on whether one should put extra money into KiwiSaver. However, I think you missed some key points about additional contributions above 3 per cent or a minimum of $1043 a year:

• I had the luxury of choosing to retire a year or two short of my 65th birthday. This would not have been possible had all my investments been locked into KiwiSaver. This would be particularly important for a person who was made redundant at, say, 63 or 64, and while not qualifying under hardship provisions to access their funds, they could find it frustrating not being able to do so.

• Additional KiwiSaver conditions are at the whim of future governments. For example, a future government could well raise the retirement age to 70, and people could not access their funds until that age. This would be frustrating for someone who had plans to retire earlier.

• A basic premise of investment is that one shouldn't put all their investments in one basket. One could consider investing in a unit fund with their KiwiSaver provider, which has quite a different risk profile, or even in a similar investment to their KiwiSaver but with a different provider.

Personally, I think someone who boasts that they are putting 8 per cent into their KiwiSaver is a bit naive in terms of investment.

However, it is great to see people putting more than the minimum 3 per cent into their retirement savings. I am a retired public servant. Although we put 6.5 per cent into our superannuation scheme - which was matched by our employer - it provides only a comfortable retirement.

It scares me that some people think that just putting away 3 per cent is going to be sufficient.

A:

You make several excellent points - and one I'm not so keen on. More on that in a minute.

But first, I wrote last week about not tying up all your savings in case of an emergency, but we should add "in case you retire early" - whether because you want to or you're made redundant.

On possible government changes, it would be surprising if a future government doesn't raise the NZ Super age. The KiwiSaver withdrawal age automatically rises with that.

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But such an increase would almost certainly be gradual - to not upset voters.

For example, the Commission for Financial Capability is looking at a plan that would start to take effect in 10 years, with the NZ Super age rising in three-month increments.

Current 55-year-olds would get Super at 65 years and three months; current 54-year-olds would get it at 65 years and 6 months; and so on, until current 48-year-olds and younger would get it at 67.

Retirement commissioner Diane Maxwell will release some recommendations - which may include this proposal - in mid-December.

I'm not so convinced that saving 3 per cent is too little for a comfortable retirement. It varies from person to person.

This Government has in the past rejected raising the NZ Super age. But a future one may well adopt this or a similar change.

There's already an increasing tendency for New Zealanders to work past their 65th birthdays. So a gradual rise in the NZ Super age might not upset many.

Another possibility is that a government could force people to withdraw some of their KiwiSaver money as an annuity - with regular payments until death, rather than lump sum withdrawals. I expect, though, that there would be some flexibility. Baby Boomers are a pretty big voting force.

Still, your basic point - that future governments may be more likely to change KiwiSaver rules than laws affecting other investments - is valid.

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And your final point, about diversification of savings, is also a good one. KiwiSaver providers are pretty closely monitored, but it's still a good idea not to have all your savings with one institution.

However, I'm not so convinced that saving 3 per cent is too little for a comfortable retirement. It varies from person to person.

Beneficiaries often get a pay rise when they start NZ Super, because it's higher than their benefit. One former beneficiary told me recently that she's managing just fine on NZ Super, and doesn't need withdrawals from the workplace pension she saved into before she became disabled. She's used to being frugal.

Others, of course, would prefer a higher retirement income. But people who save 3 per cent in KiwiSaver from when they are young, and invest in a relatively high-risk fund - except when they will withdraw money soon for a first home or retirement - will probably retire with reasonable savings.

The more savings the better, you might argue. But that needs to be balanced against having enough money over the decades for higher education, raising a family, paying down a mortgage or growing a business.

Repaying mortgage

Last weekend you responded to a lady who had a mortgage and a projected surplus after outgoings.

You suggested she use the extra money to repay some of the mortgage, and included an example with the mortgage interest at 5.5 per cent. You noted that paying down the mortgage "is the same as earning 5.5 per cent interest ... after fees and taxes".

It might have been more helpful to your readers if you had done the maths for them, which would show a very stark comparison: avoiding paying mortgage interest at 5.5 per cent after tax is equivalent to earning 7.9 per cent pre-tax, assuming a 30 per cent marginal tax rate (taxable income of $48,000 to $70,000). I have found this sort of statement a very powerful motivator for people.

Of course paying off part of the mortgage also has other benefits:

• It is, by nature, a totally risk-free "investment".

• It locks the money away from temptations that arise from time to time.

A:

Fair enough. And while we're at it, if your taxable income is $14,000 to $48,000, paying off a 5.5 per cent mortgage is equivalent to earning 6.7 per cent on savings. If your taxable income is more than $70,000, it's equivalent to earning 8.2 per cent on savings.

You can't beat that with any investment that is - as you say - risk-free.

Offset mortgage

I am writing about the first item in your column last week, the young mother whose husband has been diagnosed with terminal cancer. Normally I wouldn't write but as someone in the same age bracket as her I couldn't help but imagine myself in her position.

Another option she could consider is kind of a mix of the two - paying down the mortgage and beefing up her savings. Some banks offer offset mortgages where your savings are taken into account and removed from the mortgage total before interest is calculated for that period. In effect you're reducing the mortgage but allowing the money to remain in savings.

My partner and I have a portion of our mortgage in this kind of set-up with Kiwibank. The main drawback is you stop earning interest on the savings, but in today's low-interest environment, I've never seen that as too much of a disadvantage. The other is that the mortgage interest rate is generally floating, so a bit more volatile than the woman in question might be after.

A:

A great idea. Last week's correspondent could use either an offset mortgage, as you describe, or a revolving credit mortgage.

With the latter, you have your everyday money, mortgage and savings in the one bank account - with a large negative balance because of the mortgage. But beyond that, the two types of mortgage are similar.

If your everyday money is included, even if most of your income stays in the bank only briefly - before being spent on groceries and so on - it reduces your mortgage for a while, and therefore the interest you pay. And longer-term savings reduce your interest payments more permanently.

It's not really correct to say your savings aren't earning interest. Sure, the bank makes no interest payments. But by reducing your mortgage balance, your savings are in effect earning whatever the mortgage interest rate is, after tax - as discussed above.

Hard to get your head around? If your mortgage balance is $300,000 and your savings are $5000, you pay interest on only $295,000. Getting out of paying interest on $5000 improves your wealth as much as earning that interest on your savings.

With both offset and revolving credit mortgages, the interest rate is floating, which, as you say, adds some uncertainty. But you can have just a portion of your mortgage in this arrangement - as you have - with the rest of the loan at a fixed rate. That might also curb fees, which are often higher on offset or revolving credit mortgages.

While most banks offer revolving credit mortgages, I think only BNZ, Kiwibank and Westpac offer offset mortgages. Last week's correspondent might want to discuss her options with her banker.

Christmas giving

Many charities offer Christmas gift programmes. You buy items for people in need that are given on behalf of your family or friends. For example, you might donate money for school equipment in developing countries. You receive an acknowledgement to give to your relative or friend to show what they have "donated" to the children.

Each year, this column runs a list of charities that take part in these programmes. I've asked each charity to describe their programme.

Caritas Aotearoa New Zealand: 0800 22 10 22 or online. "Caritas Gifts of hope, life, peace and learning enable our life-changing work around the world and in Aotearoa New Zealand."

ChildFund New Zealand: 0800 223 111 or online. "Give an unforgettable gift today. Give a gift to your family that will keep on giving, a gift that grows."

Christian World Service: 0800 747 372 or online. "Double your giving: Once to a friend or loved one and once to a family in need of a hand."

Leprosy Mission New Zealand: 0800 862 873 or online. "Delight your loved ones with Really Good Gifts this Christmas, and bring God's love into lives affected by leprosy."

Mend: Mobility Equipment for Needs of the Disabled. 021 060 9631 or online. "Help Mend offer life-changing support to disabled people in poorer countries needing corrective surgery, mobility devices, physio and hearing aids."

Salvation Army: 04 802 6269 ext 24846 or online. "Thank you for your support. Through Just Gifts you help provide better living conditions, education and medical and health care."

Tearfund: 0800 800 777 or online. "Tearfund's Gift for Life is an exciting range of unique charity gifts including goats, seeds and water filters."

The Fred Hollows Foundation NZ: 0800 227 229 or online. "Give your loved one a Gift of Sight card and help restore sight to someone for $25."

World Vision: 0800 24 5000 or online. "Choose a life-changing Smiles gift this Christmas and help children and families in real need."