QUESTION: In your column last week you talked about the advantages of Dollar Cost Averaging into KiwiSaver on a weekly or monthly basis. My husband and I are both in growth funds. He is on a monthly salary while I am on weekly wages. Will I get better returns because
I am making more frequent contributions?
ANSWER: The reader last week was self-employed so he could choose between annual or more frequent contributions to the fund manager by direct debit.
In your case, because you are not self-employed, your contributions follow a different route, and pass through more hands before they reach the fund manager. When you look at your weekly pay slip, you will see deductions for PAYE and KiwiSaver. That money will be held by your employer until it is due for payment to Inland Revenue.
In the case of small employers, this is done by the 20th of the following month, while large employers (PAYE in excess of $100,000) are required to submit their deductions on the 5th and the 20th of each month. So both your and your husband's contributions will either get passed on twice a month or once a month depending on the size of your employer.
Inland Revenue then checks the figures and forwards the KiwiSaver contributions on to your fund manager. Inland Revenue pays interest at the rate of 1.95% on employee contributions from the 15th of the month that your contribution comes out of your pay packet, while interest on employer contributions is paid from the first day of the month the employer contribution arrives at Inland Revenue.
Careful audited records are kept of all KiwiSaver contributions. This information is needed to work out how much Member Tax Credit you are entitled to each year (as this is based on your own contributions) and how much you might be able to withdraw for a First Home or Hardship claim (based on your own and your employer contributions).
Whatever the timing, both you and your husband will benefit from Dollar Cost Averaging, because you are making regular payments into growth schemes. Except in periods of extreme volatility, the unit price for a growth fund will fluctuate month to month rather than week to week.
KiwiSaver fund managers track fund inflows daily and plan investment trades around new money coming in. Some schemes now have over 100,000 members. A number of investors (particularly those under 18) won't be making regular contributions, but if just half are contributing say $150 per month that adds up to several million going into the scheme each month. In a typical growth fund some of this money will be allocated to cash, while the rest will be apportioned into assets such as New Zealand and international shares, debt securities, foreign currency and commodities. As their balances grow, KiwiSaver investors are increasingly interested in how well their fund is doing, and most fund managers are very motivated to achieve the best returns within the guidelines of their particular fund.
Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 8703838. The information contained in this article is of a general nature and is not intended to provide specific or personalised advice. If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz.