Spreading your risk is a good idea. Photo / Getty Images
I am generally pleased with how things are progressing with my KiwiSaver provider. I am in my early 40s, earn quite well and have 100 per cent of my contributions in a high-growth fund.
I know I can spread some of my risk by putting a percentage into a lower-risk investment category, and I may well do so when I am in my mid-to-late 50s and perhaps a bit more risk averse.
I also wondered if it was possible to split my contributions between two different providers. It seems that this would provide an additional safety net against potential losses in one scheme. My research (I may well have missed something) suggests that this is not possible. Can you advise?
What's the modern equivalent of not putting all your eggs in one basket? Not putting all your wine in one supermarket bag? Anyway, it's a good idea.
Unfortunately, though, you're right. You can invest with only one KiwiSaver provider.
I presume this is to keep the administration simpler. For example, it would be more complex to work out tax credits if people belonged to more than one scheme. And given that Inland Revenue runs the tax credits, guess who would pick up the tab? Taxpayers.
Still, this does raise the issue of diversification. With scheme supervisors and the Government keeping a close watch on KiwiSaver it seems unlikely you'll lose money because of the way your scheme is run - as opposed to because your investments have had a bad year. Still, there are no government guarantees with KiwiSaver, so anything's possible. It pays to take an interest in who's running your scheme.
Beyond that, there are some people who could better diversify their KiwiSaver savings. You might be one of them. They are:
• Employees earning more than $34,762 a year and contributing more than 3 per cent of their pay to KiwiSaver.
• Non-employees contributing more than $1043 a year to KiwiSaver.
People in both groups could cut their contributions - to 3 per cent or $1043 - and still receive the maximum $521 tax credit and, in the case of employees, the 3 per cent employer contribution. In other words, you would still get all the KiwiSaver incentives. You could then save the extra money elsewhere.
Where? One idea is to use the KiwiSaver Fund Finder on fundfinder.nzherald.co.nz to find another KiwiSaver provider and fund that would work well for you. Then ask that provider if they also offer a similar non-KiwiSaver fund - most do - and invest in that.
You could set up an automatic transfer into that fund the day after every payday, so that the money comes out as painlessly as it does in KiwiSaver.
Why the weird $34,762 cutoff? An employee earning less than that and contributing 3 per cent of their pay would put in less than $1043 a year, and therefore receive less than the maximum tax credit. For them, it's better to either contribute more than 3 per cent through work, or put in extra directly to their provider to get to at least the magic $1043.
PS: You're doing well with your investing strategy - higher risk now and lower risk as you approach retirement.
I am contacting you on behalf of my parents.
Over the past few years they have struggled financially with a mobile coffee business that they started, and have decided to try to sell it now. At the moment they do not have any income and have had to resort to the sickness benefit to get through week by week. This has also tainted their credit rating.
The thing is, they own our Auckland family home mortgage-free, which is valued at about $960,000.
What I was wanting to do is find some financial assistance or advice on getting them into the residential real estate investment game.
Are they able to get a line of credit on the worth of their mortgage-free property to invest into a couple of cash-flow-positive properties outside of Auckland and also pay off about $15,000 of debt, all at the same time?
For example, if the worth of the current property is $960,000, can they get a line of credit for approximately $715,000? This would be $300,000 for the first investment property, $400,000 for the second investment property and $15,000 to pay off debt.
This will at least get them back on track, bring in a bit of money and also help them to build their portfolio, which would then make them feel a lot more secure and happy financially.
Good positive thinking, but I'm afraid you're probably being a bit over-ambitious.
"It is unlikely that this couple would get a loan for the purpose of buying investment properties, as the lender would want to satisfy themselves the clients could afford to service the loan," says mortgage adviser Karen Tatterson of Loan Market.
I know you're talking about cash-flow-positive properties - meaning the rental income more than covers the mortgage and other expenses. But, as Tatterson points out, "The couple would be solely reliant on the rental income to service the debt, and if one of the rental properties was untenanted for a short period of time, how would they cover the mortgage payment?
"A line of credit of $715,000 would cost approximately $4000 per month to service on an interest-only basis." And it would be more if your parents want to get the balance down, which would clearly be a good idea.
Tatterson adds that your parents' credit rating "could also affect their ability to borrow money.
"Another risk would be the management of the rental properties, especially if they were purchased outside Auckland. If they choose to manage the properties themselves, this involves a considerable amount of work, including regular property inspections, which are especially important.
"There is also the financial management to maintain the property to consider, including rates, landlords' insurance, water rates and an annual return."
Then there's worry about your parents' coping abilities. "Many couples find managing a rental investment portfolio stressful, both from a financial and personal perspective, and I would not want to see this couple suffer from any additional stress," says Tatterson.
In short, you can't borrow and invest close to three-quarters of a million dollars without taking on a fair bit of risk.
Sigh! Realism gets in the way of a dream. But Tatterson does see hope. "An alternative for this couple to consider would be to sell the existing property and buy two lower value properties, one to live in and one to rent. This would enable them to have a mortgage-free property, no debt and passive income."
I hope things go well for them.
Just read online your current article in the Herald on the exchange rates.
We've been in Australia for three years and return to New Zealand in a couple of weeks. We bought a property in rural New South Wales in 2012 with funds we brought from New Zealand when the exchange rate was NZ$1.24 to one Australian dollar.
We've now sold that property and have a decision to make about bringing the money back to New Zealand.
Currently we stand to lose about 23 per cent value, and our dilemma is are we better to invest the money in Australia and hope the exchange rate improves? Or do we bite the bullet and bring it back? At least the interest rates in New Zealand are a bit higher than in Australia.
The other consideration is the greater complexity relating to tax if we leave money invested in Australia.
What would you prefer to do with the money if there were no foreign exchange issue - for example, if you were moving from the North Island to the South Island?
If you would buy a property to live in, I suggest you bring the money back now and go ahead with your plans. Waiting could just as easily be a bad move as a good move.
However, if you would be investing the money - and your comment about higher New Zealand interest rates suggests that - you might want to move it gradually back. Perhaps transfer one third now, one third in six months and one third in a year. Then you'll be able to look back and say that you didn't move it all at the worst time.
Spreading your transfers over more than a year is also a possibility. But there's a lot to be said for moving forward rather than looking back over your shoulder.
Speaking - or rather writing - as someone who has lived in four countries, I must have lost money because of foreign exchange movements in some of my moves and gained in others.
I can't remember now which was which.
I read your last article in the Herald where you discussed hedging and KiwiSavers.
I am the managing director of Amanah KiwiSaver Plan, and our KiwiSaver fund (Amanah Growth Fund) is completely unhedged. Our investment mandate does not allow the use of hedging instruments.
Amanah Growth Fund currently invests in Amanah New Zealand Unit Trust, an unhedged fund which invests in US-listed equities.
Thanks for writing. This is another possibility for the reader looking for an unhedged KiwiSaver growth fund.
The reader should keep in mind that this fund invests only in American shares, so it's not as diversified as some of last week's options. Still, it might fit in well with his other investments.
I am surprised at a lawyer not recommending the use of a lawyer when lending to family members.
There are many nuances in tax law that the average person would be unaware of which, if not covered by correct wording of a document, could come back at you at a later date. These include laws around selling a rental property to family and specific laws around wording on loans.
The approximately $500 lawyer fees involved for each child and spouse is worth it, as is clarifying in our will what to do with money still owed should we die before full repayment.
The lawyer in last week's column, Peter Kemps of KempsWeir, certainly wasn't suggesting you don't use a lawyer when setting up a loan to an adult child and their partner. He was just saying that if the parents can call the loan back if the borrowers' relationship fails, that can be seen as a vote of no confidence in the relationship.
There are many other ways a loan can be set up. And, as you say, a lawyer's help can be invaluable.
• Mary Holm is a freelance journalist, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and 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, 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.
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