COMMENT:

I have a query/gripe about KiwiSaver. Initially, the employer contribution was tax-free and the Government tax credit matched the member's contribution up to \$1043.

Now the Government only matches \$521 and, to top it off, my employer contributions are now taxed. I now pay more tax on my employer contribution than the \$521 the Government contributes.

I haven't run the numbers but would anticipate that if you earn approximately \$60,000 or more, you would be getting taxed more on your employer contribution than the Government's \$521.

It appears that what initially started, or was pitched, as a Government-assisted saving initiative has turned into a money maker for the Government.

The burden has shifted almost completely to the individual and the employer (who has potentially reduced pay packages to offset the KiwiSaver requirement).

Is this a bit rich from the Government, or am I being a bit too cynical?

I don't think you're cynical. I think you're making an interesting point. And your maths is correct:
• If you earn \$60,000, the tax on your employer's contribution to KiwiSaver is \$540. So the Government gives you \$521 in tax credits and receives \$540 in tax from your employer.
• For someone on \$40,000, the Government would give \$521 and receive just \$210 in tax.
• But for someone on \$100,000, the Government would give \$521 and receive \$990 in tax. Not bad!

A key question, though, is whether employers have done what you suggest, and reduced people's pay rises to take into account their employer contributions to KiwiSaver.

If they have, that means that without KiwiSaver employees would have received bigger pay rises, and that money would have also been taxed.

So the Government could argue: "Why shouldn't employer contributions be taxed, just because people get the money in KiwiSaver rather than in their pockets? We're getting the same tax revenue we would have received without KiwiSaver, and we're still giving out KiwiSaver tax credits."

On the other hand, employers might actually be handing out more, in total, to employees than they would have if KiwiSaver didn't exist.

Maybe they are accepting lower profits, which means shareholders are subsidising KiwiSaver. Or maybe they've raised prices more than they otherwise would, which means customers are subsidising KiwiSaver.

The truth is it's probably a mixture, with some money for employer contributions coming from those sources, and some from smaller pay rises.

That would mean that the Government gets somewhat more in tax revenue because KiwiSaver is there, but not as much as you say. For everyone except those on really high incomes, the Government probably pays out more than it gets in.

Don't forget, too, that Inland Revenue runs the KiwiSaver money flow from employers to providers. And the Financial Markets Authority regulates providers. And both of those, plus the Commission for Financial Capability, educate people about KiwiSaver.

You're quite right that the Government did well out of the halving of the tax credit and the introduction of tax on employer contributions. But the scheme still costs the Government. Which, of course, is us in the end.

What it all really amounts to is that those not in KiwiSaver — or in but not contributing — are probably the biggest subsidisers.

PS. The tax rate applied to employer contributions — called the employer superannuation contribution tax — is slightly different from the tax on employee income. But that complicates things too much and it doesn't make all that much difference.

Inheritance investment

My two children (now 23 and 21) were incredibly lucky to inherit \$100,000 each in 2012.

We looked at Auckland investment property and felt things were so hot it might fall over at any minute. Boom crash wallop — and their money would be halved.

As we now know, I could have quadrupled it. It's not too bad of course, they have the money, which has sat untouched in term deposits ever since. But it could have been much better.

Any advice that will make me feel less of an idiot will be warmly received. (They both have the usual \$35,000 to \$40,000 student loans).

It also could have been much worse.

Imagine if you were writing to say you had put the money into investment property, and the children's inheritances had, in fact, halved.

True, property prices almost never drop that much. But let's say you put the \$200,000 as a deposit on a \$600,000 property, with the rent covering mortgage payments and other expenses.

Then the property value dropped to a bit below \$500,000, and the \$400,000 mortgage hadn't reduced much — they don't in early years. Your children's investment would be worth about \$500,000 minus \$400,000 which comes to \$100,000 — or half the original inheritance. Gulp!

In that scenario, you could perhaps be called an idiot — and a reckless idiot to boot, given the money is not yours.

Nobody is good at forecasting investment markets, not even the so-called experts. Some people get it right sometimes, but often their "skill" is largely luck.

If you had asked me six years ago what to do with that money, when your children would have been 17 and 15, my first question would have been, "When do you expect they will spend it?" If there was a fairly good chance it would be within a few years, I would have suggested good old term deposits.

But if you had said the money would stay invested for six years or more, I would probably have said a low-fee balanced non-KiwiSaver fund — which holds about half bonds and cash and half shares and property. That's as risky as I would go with someone else's money.

As it turns out, you would have done quite a bit better in such a fund, because it's been a great six years for shares too. But that wouldn't always be the case. Again, nobody knows in advance.

Oh, and by the way, I'm assuming you've suggested the kids don't spend the money on uni expenses, because they can borrow for that interest-free.

That was good advice. Nor should they use the money to pay down their student loans, unless they go overseas and have to pay interest on the loans.

The best use of the money is probably as a deposit on a home, as and when each of them wants to buy one. If that's more than a few years away, you might consider moving the money to a balanced fund now.

Given your children's ages, it would be good if they take part in the decision. You could explain that with a bit more risk they are likely to end up with more money, but that's not guaranteed. They might want to do half and half, leaving some money safely where it is.

And no more beating yourself up about what might have been. You're a responsible dad who did nothing wrong.

Finding the right fund

Are you aware of any KiwiSaver providers with a growth portfolio geared outside the norm? I was advised by a professional recently to look at my KiwiSaver fund allocation and consider providers with a growth portfolio geared more towards cash investments, as bonds are not doing very well once taxes and fees are deducted leaving a net real return.

He pointed out that many institutional providers are required to allocate a high proportion of funds to international equities despite their rather conservative growth pattern (compared to term deposits in some cases).

I am in a growth fund with ANZ and a large portion (48 per cent) is in international equities.

I would very much appreciate if you had any recommendations in this regard or other advice? If there are better returns outside of the norm, then I am interested.

First, we need to clear up a bit of language. When you say "geared" I don't think you're using the financial meaning of gearing, which is borrowing to invest.

For example, you would usually gear, if you invest in property — hopefully benefiting from growth not only on your deposit but also the bank's money.

But I think you just mean that a fund tends to invest a certain way.

I was also confused, on first reading your letter, about the idea that a growth fund would invest in many bonds, let alone cash. Growth funds invest largely in shares, which tend to grow faster than bonds and cash over the long-run, hence the name growth funds.

But I think what your adviser is referring to is the fact that the managers of some growth funds commit to investing largely in shares all the time, while others are more inclined to switch for a while from shares to bonds, and perhaps even the lower-risk cash, if they think share prices will fall soon.

This sounds great. The only problem, as I said above, is that while the managers sometimes get their timing right, they sometimes get it wrong.

The sharemarket roars upwards while they are sitting on the sidelines earning low returns in cash.

Lots of research shows that even professional fund managers often blow their timing, and that you're better off in a fund that sticks with its investments for the most part.

In another respect, too, I wouldn't rate the knowledge of your adviser very highly.

International shares — or equities — have performed really well in recent years, way better than bank term deposits.

I suggest you look on the KiwiSaver Fund Finder on sorted.org.nz to find the best KiwiSaver fund for you. Work through "Find the right type of fund for you" first, and then compare all the funds of that type.

But don't go with the ones that have high returns. Performance usually doesn't continue.

There's a pretty good chance they will perform below average in the future. Look instead among the funds with the lowest fees. Fees don't tend to change, and low fees give your fund a better chance of doing well after fees.

Seven-day banking

The "caught by a technicality" article last week raised the issue of a lower interest rate because the investment matured on a non-working day.

What an outdated concept. Who works Monday to Friday any more? Even our banks are open on weekends. And as everyone is connected by their devices every day, this restriction of business to ignore weekends has to change.

We are in the 21st century and the bank computers are all running 24/7 and ATMs and Eftpos are available in the weekend. It is about time the banks woke up to seven working days.

On a positive note, it's great to see Westpac sorted it all out for your reader.

Good point about non-stop banking, which I put to Westpac.

Here's the bank's response: "As noted in the letter, banks have worked hard to make transaction services more accessible than ever.

"Further changes to standardise banking practices seven days a week are possible — this would require an industry-wide approach and support from regulators.

"In the case of a deposit, any interest accrued on a weekend or public holiday is applied on the next business day."

Sounds as if we can keep hoping.

- Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. Her website is www.maryholm.com. 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, Private Bag 92198 Victoria St West, Auckland 1142. 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.