Kiwi Savers losing out in Kiwi Saver default funds

Martin Hawes provides his succinct thoughts .

When a child is born – 16 February 2014

Posted on February 22, 2014 by Martin Hawes and forwarded on by Alec Waugh

As a child I remember my father saying that one pound put into a bank account for a new born child and left to compound for 30 years would be worth some huge amount of money. I do not recall the number, but to my young ears it seemed some incredible sum of money – like a telephone number (although remember that telephone numbers were only four digits in those days!)

Whatever the actual numbers, we all know that a relatively small amount of money invested for a new born baby will be worth a tidy and very useful sum in 20 or 30 years. There are many of us who want to help their child or grandchild – we want to make a gift of money and use the miracle of compound interest to support the new little miracle of life.

So, how do we go about this? After all, intent is one thing but the practicalities are quite another. While it may seem a simple thing to use the power of compound interest for the years a child is growing, when you really look at it, things are not that simple.

The first difficulty is the ownership of the fund that is established. If the fund is in the child’s name, on turning 18, the money becomes that child’s. That may be fine – you may be perfectly happy for the child to take the money and buy a motorbike and have a big party, but the intent of putting aside some money is more usually for the child’s education or to help with the deposit on a house.

As an alternative, you may hold the money for the child, resolving to give this money at a certain age or circumstance (e.g. first house or tertiary education). The difficulty with this is that in the absence of any legal document to the contrary, the funds that you hold for the child will be yours and deemed so in areas like tax, asset testing, Working For Families, Insolvency etc.

To resolve this you could establish a trust – but if you have not already established a trust there will be considerable expense for establishment and on-going management and interest from the child’s fund could be taxed at 33c.

The second difficulty is the investment strategy. It is easy enough to set up a bank account in the child’s name and to make contributions to it which will mean that the interest will be taxed at the child’s own low rate. However, a simple bank account will give low returns. This is important: for an investment of 20 years or more, there should be a very high proportion of shares and property. To illustrate, a gift of $10,000 put into a simple bank account earning 3% would be worth $18,000, but a growth portfolio earning 6% would be worth $33,000.

The third difficulty is tax. This is linked to the ownership of funds: if the donor (parent, grandparent etc.) owns the fund, the returns are taxed as their income; if the child owns the fund, they are likely to be taxed at a much lower rate.

So, given the desire to use the power of compound interest to give the child the best start, what should you do? Well, there are options, but none of them is perfect: first, you could simply open a bank account in the child’s name (but, as shown, the lower returns will mean that compound interest will struggle to work its magic).

Second, you could set up a KiwiSaver account for the child, a nice cheap solution with better returns and good tax treatment. (However, the child really needs the money at around age 20. Although the child may be able to withdraw from KiwiSaver for a first house, if some future government rescinds that ability, the child will have to wait 65 years to receive the money).

Third, you could establish some kind of trust for the child (but the costs of this mean that you will have to gift a good deal of money to make it worthwhile – and there are also difficult tax considerations).

I do not have an easy answer to this. Your love for that new little speckle of life means that you want to help, but you have to recognise that in a practical sense using compound interest to give that help is not simple. You need to weigh all the factors and then choose the best (although probably imperfect) means of help for your family.

Martin Hawes is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at This article is of a general nature and is not personalised financial advice.

Asking for a pay rise – 9 February 2014

Posted on February 22, 2014 by Martin Hawes

In all the years that I have been following public affairs, I don’t think I have ever before heard a Minister of Finance tell people that they deserved a pay rise. And yet last week, that is almost what happened: Bill English was quoted as saying that people were now entitled to think that their bosses would come to the party with pay rises. It must be election year.

Bill English is right, of course: many people have done it hard for years and with the economy in a growth phase, this year seems the time for a dividend for workers as well as business owners. While pay rises may not be massive nor for everyone, I do think that there are some who can look forward to higher incomes in the next few years.

One of the things that could easily be overlooked in Bill English’s comments was that those who could particularly look forward to pay rises were those with the right skills. I think it certain that incomes will not rise evenly across the board – that some people will do better than others. A lot better.

Technological change means that certain industries will be willing to pay more for good people while others will not. There will be businesses that are able to pay more, especially those that can use technology to improve productivity. However, there will be others (especially in some service industries) that will not be able, nor need, to pay better.

You do not want to be stuck in this second category: it will be skills (and business’s use of technology to improve productivity) that will let people enjoy the benefits of an improving economy.

Income is obviously important to everyone. First, we have to remember that to get ahead financially it is the surplus that we have that counts more than anything else. The savings rate (i.e. the amount that you can put to savings) will nearly always beat the investment rate (i.e. the rate of return that you can get from your investments). Developing a surplus that you can save and invest (or use to retire debt) is your first financial priority.

Second, there are two sides to a budget. To achieve a surplus, most people look solely at the expenditure side to see what they can cut out. However, more important for a surplus than reducing spending is the income side of the budget – increasing your income is usually a much more sustainable way to a good and increasing surplus.

So, assuming that you work in the right industry and that you seem to have the Minister’s blessing (maybe even his encouragement) how do you go about improving your income?

The first thing about getting a pay rise is that you probably have to ask for it. Many people feel a bit awkward about fronting up to the boss with hand extended as they ask for a bit more. Nevertheless, in many work places it is unlikely that you will be simply made a great offer out of the blue. You are probably going to have to take a deep breath and, like Oliver Twist, ask for more (remembering as you do that no less than the Minister of Finance said that such expectations were reasonable).

Second, arm yourself with the facts. You need to know what others are paying for the same work that you do and pitch yourself at that level. No employer wants to see a competent staff member leave to find that there is greater cost in finding and hiring a new one. In negotiations, facts win and if the fact is that others are paying more than you are getting, that will be recognised. Anyway, if your boss does not recognise that other employers are paying more for that work, why stay with one who is underpaying?

When you get a pay rise (or if you own a business and get increased profits) try to put all of the additional income that you can to savings or increase debt reduction. Beware spending creep: if you do not act to do something quite definite with the extra money, it will slip through the system fast enough. Sure there will be those who need every extra dollar to hold the budget together: this increase has been a long time coming. Nevertheless, an increase in income is a great opportunity to get ahead. It might be a good while until another Minister of Finance says you are entitled to expect a pay rise – better take advantage of it.

Martin Hawes is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at This article is of a general nature and is not personalised financial advice.

The choices we make – 2 February 2014

Posted on February 22, 2014 by Martin Hawes

Our successes come down to the decisions that we make. Ultimately, in life and in money we are the sum of our past choices – both good and bad. Some of our choices and decisions are small and pass by without us ever realising that we made them; others are big and we may stress over them for weeks or months.

These big choices are things like whether to buy a house, which type of KiwiSaver fund to join (conservative or aggressive) or how to arrange your investments in retirement. Most of us realise that these are big decisions which will probably have far reaching ramifications and so we get the necessary information and make the best choice that we can. Nevertheless, it is often only in hindsight that we see whether we made the right or wrong decision (that the house we bought in 2001 was absolutely the right thing to do but staying with the KiwiSaver default fund was quite wrong).

A good decision making process seems very easy: gather all the facts, look at all the opportunities and possibilities and weigh the consequences including the things which might go wrong. Most of us do these things when we are making decisions almost instinctively.

However, decision making in finance is often distracted by past habits and the influence of other people. In my experience with investment, people often do not consider all of the opportunities –many people simply don’t know what they don’t know. They therefore stay with the familiar by keeping on doing what they have always done. For example, they do not know all of the investment opportunities that are available and so default to finance companies or bank deposits.

Similarly, people can be caught up in a wave of excitement for a particularly popular investment and go into it on the basis that everyone else is doing the same thing (there is a comfort of being in a crowd: if everyone is doing something, it must be right).

To default to the popular or the familiar may be easy but it is by no means the best. In fact, with investment in particular, you are often best to be a contrarian and do exactly the opposite of what others are doing. More than anything else, money is lost to investors who join the mob and go into a booming market just as it is nearing its frenzied peak. A desire to follow the crowd is a dangerous distraction to good decision making.

In one very important area there are choices to be made frequently, sometimes several of them every day. While none of these little decisions is particularly important by itself, the sum of all of them (how many we get “right” and how many we get “wrong”) is critical.

The area that I am referring to is the way that we manage our personal expenditures. We all make decisions regarding where we will spend our money: sometimes, perhaps, we may make a dozen or more of these choices each week. Usually no individual decision matters very much but the aggregate of the decisions make up a pattern which will eventually be very important indeed.

Buying your lunch for $10 may seem to make little difference on any given day but with time the difference is stark. Success or failure often comes down to a set of habits which are either good or bad and so will take you either forwards or backwards. None of these habits may look very significant on a daily basis but often these small, everyday habits accumulate and become just as important as the big decisions.

Like investment decisions, familiarity and being with the crowd may divert good decision making: you may decide to buy lunch every day because you have always bought your lunch (it’s a habit) or because that’s what everyone does at your work place.

The important thing is that decisions are taken mindfully, not mindlessly. Write down all of the alternatives and write down the pros and cons of each. Be wary of dismissing a possibility too quickly: doing something that you have never done before (whether buying into the share market or making your own lunch) may seem too hard, but in the long run it may, in fact, be the best and the easiest.

You are the choices that you have made in the past and you will become the choices that you make in the future. Good decisions mean good habits – and good habits mean success.

Martin Hawes is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at This article is of a general nature and is not personalised financial advice.

The overvaluation of the NZ economy – 26 January 2014

Posted on February 3, 2014 by Martin Hawes

Two weeks ago, the Economist newspaper published its quarterly survey of global house prices. In most countries surveyed, house prices are starting to rise again which is regarded as being very positive for some places as they struggle to move out of recession.

For its house price survey, the Economist measures whether houses are overvalued or undervalued in each country relative to the long-term average. New Zealand features in the Economist’s list and it is probably no surprise to most of us that our houses are overvalued by both of the methods of measurement that the Economist uses. In fact, by one of the measures, New Zealand houses are 71% overvalued while the second measures shows that we are 26% overvalued.

With these sorts of figures you can certainly see why the Reserve Bank is concerned, and why it has restricted high loan to value lending.

So, how does the Economist measure whether a country’s houses are undervalued or overvalued? After all, the Economist is a highly respected publication and their methodology must be of interest.

The first of the two measures that the Economist uses is a simple one: it compares incomes with house prices. If house prices move up in value but disposable incomes stay much the same, house prices become more highly valued. However, if incomes rise at a faster rate than house prices, house prices are of lower value. By this measure, New Zealand is 26% overvalued.

The second measure compares rents to house prices. I think this measure is more important because all investments should primarily be valued for the income that can be derived from them: this is true whether we are considering businesses, shares, bonds or property.

The principle of this measure is that people purchase a house for the rents that that are earned (in the case of property investors) or the rental costs that are saved (in the case of owner occupiers).

Clearly there are other benefits for owning a house, but from a financial point of view, a couple who is looking to buy a house has a choice: they can carry on paying rent or they can substitute rent by home ownership. For this couple, the amount that they are saving in rent and the amount that they will have to pay for the house are important numbers and the relationship between the two is critical – and it is that relationship which the Economist measures.

This is no different from the analysis that investors constantly make: if they pay a certain price for an asset (be it shares, bonds or a property) they want to know that the income they will receive is enough. In the case of a potential home owner, instead of receiving income they are substituting the cost of rent – they need to consider if the rent that is being saved is sufficient to justify purchase.

Therefore the relationship between rents and house prices is critical. If you were buying a business you would certainly look at the profits that the business was projected to make and compare that to the price you would have to pay; if you were buying a bond you would look at the amount of interest that you would receive compared to the price that you pay for the bond. If you are buying a house you look at the rent that you would receive (investors) or the rent that you no longer have to pay (occupiers) compared to the house’s price.

Unfortunately, for each of these different assets in which you might invest, the language is different: for a business we usually use something called a price:earnings ratio; for bonds we look at yield. However, although the language is different they are all doing the same thing: comparing the price that they pay to the income that they will receive (or, in the case of owner occupier house, the costs that they will save).

Of course this does not take into account capital gain – and one of the reasons that people own houses is to hedge against major increases in house prices. However, investment analysis looks first at income compared to price before any estimate of capital gain. True investors are looking for income (or cost substitution) and they hope that the investment is a valid one from income alone. After all, income is relatively certain but capital gains much less so.

In New Zealand house prices have risen (in some places a great deal) while rents have moved little. This means that the rent to house price comparison is well out of line with its long run average – 71% out of line according to the Economist’s figures.

Martin Hawes is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at This article is of a general nature and is not personalised financial advice.

“Rock Star” economy – 19 January 2014

Posted on February 3, 2014 by Martin Hawes

So, the New Zealand economy is to be a rock star this year. It is about time – for years (or decades) New Zealand has spluttered along with a little growth interspersed amongst longer periods of flat-lining or even decline. Without getting too carried away (“rock star” is quite extravagant language) at last the elements seem to be in place to give good growth for at least a year or two.

If you believe the growth story for this year, this begs the question: what are you going to do with these relatively good times? If, like many, your view is optimistic, how should you manage your finances for best effect?

The first thing to acknowledge is that with growth comes higher interest rates. Many people have become used to our current interest rates, thinking that they are the norm. In fact, they are by no means normal – by any standard they are low and most likely to rise. Such a rise will be welcomed by investors, but will be feared by those with mortgages.

Those with mortgages (or contemplating increasing the mortgage) should plan on an interest rate of up to 8%. That figure of 8% is not simply plucked out of the air: it is the estimate from Graeme Wheeler, Governor of the Reserve bank (and he should know better than most).

Loading up on debt at the moment is probably not a good idea. Even though the economy is likely to grow (and, therefore, your income likely to improve) interest rates will increase faster than incomes. If your budget looks dodgy at an interest rate of 8%, you really must start to fix the rate if you haven’t already.

On the opposite side of the interest rate coin, this is not a time for investors to hold fixed rate investments – investors should be wary of buying bonds which have the interest rate locked in for the long term. Instead, they should keep to the short end of the yield curve so that they are ready to buy longer maturity bonds when rates are higher.

Other investments (especially shares) also warrant some caution. A strong and growing economy is generally good for businesses and I think that it likely that 2014 will be another good year on the share market. However, while I will remain fully invested in shares, I am not going to over-do it: this is not a time to sell the kids or pawn Granny’s sapphire broach so that you can pour everything that you have into the share market.

Many shares are already fully valued. The share market has had a great run over the last couple of years but you have to remember that share prices rise in anticipation of growth – i.e. the market is ahead of what is happening at the moment. Much of the expected economic growth that we hope to see is already built in to share prices: we have already enjoyed much of the share price growth that a better economy and higher business profits would dictate.

Moreover, it is election year (how could we forget that!) and uncertainty of electoral outcome will ebb and flow. Markets hate uncertainty and at any time the New Zealand share market may not like a projected result that pollsters publish (let alone the actual result in November).

All running to form, a good economy ought to lead to a higher exchange rate. With the Kiwi dollar well above its long-term average, this year seems a good time for investors to shift some money offshore. Other countries offer good investments along with the benefits of diversification for Kiwis – and a time of currency strength provides a good opportunity.

Finally, do not forget that there is nothing certain that the New Zealand economy will metamorphose from competent covers band to international rock star. While I think it likely that we will probably enjoy good growth this year, we have to remember Niels Bohr’s famous quote: prediction is difficult, especially when it is about the future. Our economy will always be vulnerable to economic shock whether external (from International events) or internal. You can never be absolutely certain that what you (or others) predict will actually happen.

Nevertheless, with caveats in place and without guarantee, I hope and expect that 2014 will be a good year: a time for better profits for business and a time for salary earners to ask for (and maybe get!) pay increases. If, like me, growth is your point of view, it is time to arrange things to enjoy it.

Martin Hawes is an Authorised Financial Adviser and a disclosure statement is available on request and free of charge, or can be found at This article is of a general nature and is not personalised financial advice.

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