KiwiSaver Myths – What You Need To Know

KiwiSaver has been around now for over a decade.

I have helped people to understand and make their KiwiSaver funds work for them, but I still sit down with many people that still have some common misconceptions.

Some of the common ones are highlighted in this article: KiwiSaver Myths

I would be happy to answer any other questions that you may have regarding KiwiSaver and if you wish help get you on the right track.

Please feel free to contact me or call on 09 551 3500.

Homeowners not losing sleep over interest rate rises, survey shows

A new survey has revealed Kiwi homeowners are largely unfazed about their ability to cope with mortgage rate rises, but they are continuing to find it difficult to curb spending on consumer items.

The nationwide survey by mortgage franchise network New Zealand Home Loans (NZHL) found more than half of respondents (57.6%) were either not concerned or were neutral about the potential for future interest rate increases.

The sentiment comes after the Reserve Bank held the official cash rate (OCR) last month at 1.75%.

Speaking to NZ Adviser, NZHL chief executive Julian Travaglia said although interest rates are slowly going up they are not completely unpredictable like in the past.

“I remember the days when rates were bouncing around like an elephant on a bungee cord,” he says, in contrast to their current slow but steady climb and the Reserve Bank indicating an OCR increase is unlikely any time soon.

“I don’t see the pressures that would require the Reserve Bank to force the OCR up particularly given that the housing market, at least temporarily, seems to be cooling.

“I think has made people a little bit complacent. I think people still don’t really understand that interest rates are by and large driven by off-shore funding costs by the banks as opposed to necessarily the OCR.”

He says mortgage holders should be paying off their debt faster and smarter.

“What we’ve seen from people’s spending habits is that they’ve managed to get themselves a home loan over a long period now when rates go up – when they come off that fixed rate and go on a new one, they can’t suddenly extend their home loan term out to make the payments lower again.

“So it’s going to force people into a position where they’re going to have to either make some reasonable cut backs or they’re going to get into some financial difficulty.”

Despite the view on interest rates, the survey found that homeowners have some areas of spending that don’t feel they have under control, with the biggest problem area of unplanned spending being around consumer items such as household electronics, tools and sports goods where 47% of respondents found difficulty controlling spending and secondly for services like household maintenance at 46%.

Travaglia he is concerned about those who have overextended themselves in the last few years and now tied to a hefty mortgage.

“If they haven’t been paying that off sooner – making hay while the low interest rate sun’s shining – they could find themselves in trouble down the track,” he told NZ Adviser.

The survey respondents consisted of 1,994 NZHL clients.

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Why KiwiSaver balances go up… and down

Quick question: what’s the difference between a savings account and a KiwiSaver account?

Short answer: when you put money in, the first always goes up, but the other goes up and down. That’s no small thing.

And while we personal finance folks like to go on about the magic of compounding for both saving and investment, sometimes we’d be better off pointing out how different the two are.

The one caveat to saying that a savings account always goes up is inflation. Savings can actually roll backwards as well, when you bring inflation into the picture. You’re adding money, but its real value and how much it can buy gradually becomes less and less. This is why we need investing.

Which brings us back to KiwiSaver, which is not a savings account as many people think of it, but rather an investment account. And investing is aimed at buying assets that become more valuable over time, despite inflation. It’s the remedy for inflation.

But what could make a KiwiSaver account balance lose ground?

Why your KiwiSaver account can go down

Okay, so I won’t bore everyone with too technical a discussion on unitisation, but the key thing to know is that when you put money into KiwiSaver, you’re buying units.

Units are a way of keeping track of what we own in KiwiSaver.

These units are linked to the assets our fund has invested in, such as shares, commercial property or bonds. Think of the investments like a big fat orange – and our units as a segment of that. When the orange rises or falls in value, so does the value of our segment.

Unlike a savings account, where we’re setting money aside, in KiwiSaver we are buying things that have value. That orange can be priced higher on the market at some times, lower in others. It’s a very normal state of affairs.

When we look at a savings account balance, we rightly think about how much we have. Not so with our KiwiSaver balance. When we look at that, what we’re really seeing is how much our fund’s investments and our corresponding units are worth – what their value is right now. Again, no small thing.

So perhaps instead of asking ourselves how much we have in KiwiSaver, we should be asking, “How much is my KiwiSaver worth at the moment?” Might be higher, might be lower.

Of course, the idea is for our units to increase in value over time. Either because someone else will pay more for them on the market or because they earn income like rent or dividends, the overall trend should be up. That’s why we do this! Without the aim of a return, there would be no point.

But there is such a thing as a negative return.

Why your KiwiSaver account will go down

Since the GFC in 2008, we’ve had good times of growth in KiwiSaver. Long may that continue!

But this also means that most of us have only seen things move in one direction, with KiwiSaver balances almost never heading down. Things did dip a bit last August, but because most of us contribute small amounts regularly to our KiwiSaver, we probably only saw things flatten out a bit. Our balances would not have gone down at all.

At some stage they will. If you remember the GFC or are a veteran of the dot com bubble, you’ll remember how quickly markets can turn, and how assets can suddenly be worth less. When something like that happens again, we will see our KiwiSaver balances tumble.

Again, this is because our balances do not measure the money we have, but what our units are worth.

And because people feel losses so much more acutely than gains, typically there will be thousands of people calling up their KiwiSaver providers trying to understand how on earth they have lost money when they have been putting in cash all this time! We’ll need to be ready.

Much of this is about the right mindset to have when there is a downturn. Ideally, we’ll say something like:

• “Yep, saw that one coming.”
• “Bound to occur from time to time.”
• “Must be that point in the cycle.”
• “I wonder what it’ll be worth in 10 years?”

The worst action would to be to act rashly and run for cover. “Sell! Sell!” is the classic scene of a moneybags barking into a phone to his broker. If we suddenly sell our units and buy others that seem far safer in another fund, we effectively lock in our losses and miss out when values rebound. We lose money permanently.

It’s all about perspective. Because we are typically drip-feeding into our funds, when unit prices plunge, they actually become a bargain. Someone might say, for instance, “I’m putting even more money in now because I know I’ll reap rewards in the future.” When oranges are on sale, it can be a good time to buy.

Now if any of this talk about balances moving up and down makes you anxious, you should contact us to make sure you’re in the fund that suits you best. After all, you should be relaxed about your KiwiSaver and not losing sleep.

So what’s the difference between a savings account and a KiwiSaver account? One only goes up. The other goes up and down, but should always be worth much more in the long run.

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Are You Maximising Your KiwiSaver? – Make sure you do by 30th June 2017!

I wanted to make you aware of Member Tax Credits for KiwiSaver that you are able to claim.

There were just under 580,000 eligible KiwiSaver members who received no contribution from the Government in their accounts in the 2016 financial year. That’s up from 573,000 the year before, 517,000 a year earlier and 466,000 in the 2012/2013 year. – Why let the Government keep money that is entitled to you!!

The Government contribution to your KiwiSaver savings is worth up to a maximum of $521.43 – but to get the full amount, you need to have contributed at least $1042.86 by 30 June 2017.

The Government pays 50 cents for every $1 you contribute, the maximum will be $521.43, so therefore you need to contribute $1042.86 to maximise the tax credit

If  you are 18 or over, working, self-employed or not working, you can get these tax credits as long as you contribute $1,042.86 for the year. 

You can check your KiwiSaver contributions online with most providers and see if you have contributed at least $1,042.86.

You DO NOT have to contribute if you do not wish to or you can contribute what is affordable in order to get at least some of the $521. (So for example if you contributed $500 you would receive $250 tax credit).

We can show you ways to make this easier over the course of the year and plan it so that you are maximising the benefits of KiwiSaver.

If you have any questions, then please feel free to contact me on 09 551 3500 or email info@insurenz.co.nz.

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RBNZ forecasts low rates to stay, sees weaker inflation ahead

(Bloomberg) — New Zealand’s central bank kept interest rates at a record low and forecast they will remain there for an extended period, saying inflation will slow. 

“Monetary policy will remain accommodative for a considerable period,” Reserve Bank Governor Graeme Wheeler said in a statement Thursday in Wellington after holding the official cash rate at 1.75 percent. “Numerous uncertainties remain and policy may need to adjust accordingly.”

Wheeler is wary of stoking expectations of a rate increase for fear of boosting the kiwi dollar and curbing inflation, which returned to the midpoint of the RBNZ’s 1-3 percent target band in the first quarter for the first time in more than five years. The bank projected Thursday that inflation will slow to 1.1 percent in the first quarter of 2018, and said a premature monetary tightening could undermine growth.

The New Zealand dollar fell more than one U.S. cent after Wheeler’s statement. It bought 68.28 cents at 10:34 a.m. in Wellington from 69.37 cents immediately before the release. The currency’s 5 percent decline on a trade-weighted basis over the past three months is “encouraging and, if sustained, will help to rebalance the growth outlook towards the tradables sector,” Wheeler said.

All 16 economists surveyed by Bloomberg expected Thursday’s decision, and they all forecast the benchmark rate will remain at 1.75 percent throughout this year. Four tip a rate rise in early 2018, and swaps data late Wednesday showed a 69 percent chance of an increase in the first quarter. Those odds fell to 58 percent today.

“The inflation forecasts seem to be testing the realms of credibility, given an economy that is forecast to continue to grow above trend,” said Cameron Bagrie, chief economist at Australia & New Zealand Banking Group Ltd. in Wellington. “However, the message from the RBNZ is clear: policy is set to remain on hold for a considerable period and it has no interest whatsoever in pre-empting a policy tightening.”

On Hold
The central bank projected the average OCR will be 1.8 percent in early 2018, maintaining its previous forecast. Its projections show interest rates won’t start to rise until the third quarter of 2019, also unchanged from its last estimate.

“Premature tightening of policy could undermine growth, causing inflation to persistently undershoot the target midpoint,” the RBNZ said in its Monetary Policy Statement. At the same time, “further policy easing, in an attempt to see non-tradables inflation strengthen more quickly, would risk generating unnecessary volatility in the economy.”

Even though inflation has picked up much faster than the RBNZ expected, climbing to 2.2 percent in the March quarter, Wheeler said that was mainly due to temporary influences such as food and fuel prices. Recent developments “on balance are considered to be neutral for the stance of monetary policy,” he said.

Strong Growth
New Zealand’s economy expanded at a healthy clip through 2016, supported by record immigration and booming tourism and construction. Still, gross domestic product rose 2.7 percent in the fourth quarter from a year earlier — less than the RBNZ and most economists expected.

“The growth outlook remains positive, supported by on-going accommodative monetary policy, strong population growth and high levels of household spending and construction activity,” Wheeler said.

Growth will accelerate to 3.7 percent in the first quarter of 2018 from a year earlier, the RBNZ forecast today.

Wheeler in October introduced new lending restrictions for property investors in an attempt to cool the nation’s rampant housing market and give himself more room to keep rates low. There are signs the tighter rules may be having an impact, with house-price inflation slowing in largest city Auckland.

“This moderation is expected to continue, although there is a risk of resurgence given the continuing imbalance between supply and demand,” Wheeler said.

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Reserve Bank delivers cash rate call

The Reserve Bank of New Zealand (RBNZ) has this morning left the official cash rate unchanged at 1.75%. 

Governor Graeme Wheeler said in a statement, “House price inflation has moderated further, especially in Auckland. The slowing in house price inflation partly reflects loan-to-value ratio restrictions and tighter lending conditions. This moderation is projected to continue, although there is a risk of resurgence given the continuing imbalance between supply and demand.

“Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.”

Canstar general manager Jose George said it is an uncertain environment for home owners and warned on the increasing pressure for mortgage holders.

“As recent statistics show, while house prices have started cooling in  Auckland and other larger cities, mortgage rates are starting to trend upwards,” said George.

“Independent of OCR, the costs of servicing a mortgage are rising. Couple this with rising inflation and the flow-on effect this could have on other living costs, you have a situation where an already stretched household budget will not be able to take the added pressure for most NZers.

“For savers the situation is more positive.  Despite a series of drops in OCR, term deposit rates have remained largely untouched over the last 12 months or so. We are now starting to see increases in deposit rates, reinforcing the belief that banks are keen to grow their existing domestic deposit book.

The full statement by Reserve Bank Governor Graeme Wheeler is below:
Global economic growth has increased and become more broad-based over recent months. However, major challenges remain with on-going surplus capacity and extensive political uncertainty.

Stronger global demand has helped to raise commodity prices over the past year, which has led to some increase in headline inflation across New Zealand’s trading partners. However, the level of core inflation has generally remained low. Monetary policy is expected to remain stimulatory in the advanced economies, but less so going forward.

The trade-weighted exchange rate has fallen by around 5 percent since February, partly in response to global developments and reduced interest rate differentials. This is encouraging and, if sustained, will help to rebalance the growth outlook towards the tradables sector.

GDP growth in the second half of 2016 was weaker than expected. Nevertheless, the growth outlook remains positive, supported by on-going accommodative monetary policy, strong population growth, and high levels of household spending and construction activity.

House price inflation has moderated further, especially in Auckland. The slowing in house price inflation partly reflects loan-to-value ratio restrictions and tighter lending conditions. This moderation is projected to continue, although there is a risk of resurgence given the continuing imbalance between supply and demand.

The increase in headline inflation in the March quarter was mainly due to higher tradables inflation, particularly petrol and food prices. These effects are temporary and may lead to some variability in headline inflation over the year ahead. Non-tradables and wage inflation remain moderate but are expected to increase gradually. This will bring future headline inflation to the midpoint of the target band over the medium term. Longer-term inflation expectations remain well-anchored at around 2 percent.

Developments since the February Monetary Policy Statement on balance are considered to be neutral for the stance of monetary policy.

Monetary policy will remain accommodative for a considerable period. Numerous uncertainties remain and policy may need to adjust accordingly.

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Government may scrap KiwiSaver ‘holiday’

The Government is considering changing regulations around KiwiSaver holidays after calls from retirement chiefs to tighten the rules.

The Commission for Financial Capability wants five-year payment breaks scrapped with payment breaks rolled over one year at a time.

It also wants the word “holiday” replaced with “suspension” because it fears the word holiday sounds too upbeat and may be encouraging savers to think of it as a positive.

James Hartley of the Ministry of Business, Innovation and Employment said it was considering the requests for change to the voluntary, work-based savings scheme.

“The Government is considering the Commission’s recommendations, including those relating to the KiwiSaver contributions holiday, and will respond to those recommendations in due-course,” Hartley said.

The Commission’s general manager investor education, David Boyle, said the changes were essential to take KiwiSaver from “infancy to adolescence” in good shape.

He was admandent the work “holiday” needed to go.

“That word gives the wrong impression that it’s something good,” he said.

“New Zealanders need to be made aware how financially damaging taking a five year break can be – it shouldn’t be seen as a holiday.”

Boyle pointed out suspending payments meant losing not only the employee and employer’s contribution but also the $521 annual tax credit.

He said if the “suspensions” were reduced to one year people could reassess their financial situation and if necessary take another year.

“A lot of people are on a “holiday” when they have recovered financially.”

“Some actually forget they have stopped paying into their KiwiSaver.”

Boyle said taking a holiday on an income of $35,000 meant a loss of more than $2600 a year including the tax credit.

“Losing that amount has a huge impact on someone when they have stopped working.”

More than 765,000 people were taking a break from payments in the last financial year, to June 2016.

And that number was increasing each year, according to Financial Markets Authority data.

Savers can take a break of up to five years. But a five-year break at age 25 would cost around $40,000 by the time savers reach 65.

ANZ, New Zealand’s largest KiwiSaver provider, says that more than 80 per cent of its members who ask for a contributions holiday take it for the maximum five years. Many then roll over onto another holiday when the first finishes.

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