Kiwi Saver, Mary Holm financial writer and columnist

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Mary’s Q&A column appears in the Business section of the Weekend Herald. Mary was a finalist for the "Best Columnist – General" award for this column in the 2014 Canon Media Awards.

NZ Herald 1 September 2018

Q&As: Family rescues woman from 'loan shark'
- Couple should concentrate on reducing mortgage
- Should couple be with same KiwiSaver provider?
- KiwiSaver review good but not ideal
- Money Week coming

Question: A relative of ours got herself into some difficulty paying her bills. She borrowed $3,000 from an Auckland "loan shark" outfit.

We have now opted to pay the amount off for her, to get clear of a never-ending downward spiral she was in.

The nominal interest rate charged is 39 per cent. Then there is the $18 per month "admin" fee. This would appear to remain constant for the life of the loan - so starts at an annual rate of 6 per cent, but by the end of the loan - allowing, say $300 left - would be about a 43 per cent per year interest rate.

So, let's say the average for the life of the loan is another 18 to 20 per cent added to the 39 per cent interest. That makes the real rate - not counting the establishment and "early payout" charges - of about 60 per cent per year.

I think that is all pretty terrible, and possibly typical of the trouble people unsophisticated in finance, and possibly desperate, get themselves into. Just thought you might be interested.

Answer: I am indeed interested, but sadly not shocked, as I've seen this before.

Part of the trouble seems to be that the mainstream banks often won't lend to people in financial strife. As Bob Hope once said, "A bank is a place that will lend you money if you can prove that you don't need it."

So people who urgently need cash may have nowhere to go but firms like this - sometimes called payday lenders because borrowers hope to be able to repay the loan next payday. Unlike banks, these places often welcome borrowers with open arms, presumably because the firm can make such a big profit from them.

One problem is that borrowers may not realise that what look like small fees add up. In your relative's case, she might have thought $18 a month in admin fees isn't much. But as you point out, month after month it hugely adds to her effective interest rate.

What's more, there are upfront charges. The info you sent me shows your relative paid a broker fee of $110 and other start-up fees of $336. So before she'd even started, her $3000 loan was $3,446. And if she pays off the loan early, the early payout fee is $35.

I've heard of New Zealand lenders who have charged what amounts to 800 per cent a year on a loan. Loans of $500 have grown to $3000, and people who have wanted to borrow $1000 have been talked into taking $2000 - at huge interest. But your example is bad enough.

And I hate the ad at the bottom of the firm's email to your relative. It shows a picture of a young woman on a mountain looking out across a beautiful valley with lakes and mountains in the distance. It suggests wonderful times ahead. If you borrow from this firm? I don't think so.

I've met people at conferences who run firms like this, and I've sometimes plucked up the courage to ask them how they feel about what they do. Their reply is usually along the lines of, "We help people who are often in serious difficulties. Nobody makes them come to us. They choose to borrow."

It's hard to argue with that. I just wish there were more lenders who operated somewhere between banks and loan sharks. They could charge more interest than banks - to take into account their extra risk - but not extortionate rates.

Actually, we might get more middle-level lenders in New Zealand if Commerce Minister Kris Faafoi gets his way. He has been talking for some time about capping interest rates, and the Ministry for Business, Innovation and Employment (MBIE) recently sought feedback on a review of New Zealand's consumer credit legislation. The MBIE paper includes proposed caps on interest rates and fees, and higher penalties for irresponsible lending.

Interest rate caps are appealing, but they're not a cure-all. They are used in many countries, but critics say they simply make credit unavailable for some high-risk borrowers, who end up borrowing from illegal operators or perhaps committing crimes to get cash. It will be interesting to see what happens in New Zealand.

In the meantime, good on you for "rescuing" your relative. I hope she can set things up so she doesn't get into the same situation again. You might want to make a condition of your help that she goes to the National Building Financial Capability Charitable Trust, which is in the process of changing its name to FinCap.

This organization offers free help for people in financial difficulties. As it says on the website, www.fincap.org.nz, "Budgeting services offer free, confidential budgeting advice. With a financial mentor, you can create a plan to get out of debt, save money and start building a future for you and your family."

Other readers may want to use this service too. It operates in many parts of New Zealand.

Question: We are a couple aged 65 & 66 who have worked hard all our lives and still are.

As 40-year-olds we had both a mortgage-free home and holiday home we built ourselves. Unfortunately we made some very bad financial and business decisions. Although we still have a small but nice home - GV $950,000 in Auckland - we still owe $100,000, and we lost our holiday home to repay debts.

We have about $35,000 in KiwiSaver and another $12,000 in savings. We earn net $5000 per month working, plus our super of $2000 per month. We have just upped our mortgage repayments so it will be repaid by 2022, by which time we are in our 70s.

Should we put all the KiwiSaver on our mortgage now to reduce that, or keep doing what we are doing?

We have also thought of buying out of Auckland to have some extra cash as retirement funds are not looking great right now, and we are destined to work another five-plus years just to keep up.

Answer: Sounds as if you've learnt some tough lessons. But thank goodness you've still got your home, and you're able to keep working until you can get rid of that mortgage.

Your question is one that faces many people: is it better to get rid of debt or keep investments - or in some situations add to your investments.

Sometimes the question comes in this form: "Should I put extra savings into paying down my mortgage or into KiwiSaver - given that I'm already contributing enough to KiwiSaver to get the maximum tax credit and employer contributions?"

It boils down to which is higher:

- The return you earn in KiwiSaver, after fees and tax.

- The interest rate you pay on your mortgage.

The only trouble is we don't know the future KiwiSaver return. We can look at how well your fund has been doing lately, but from here on it might do better or it might do worse.

Because of this uncertainty, I usually favour paying down the mortgage. It's the equivalent of having a risk-free investment that pays you whatever the mortgage interest rate is. That's a pretty good deal - and will get better if mortgage rates rise.

Once you've paid the mortgage off, though, I urge you to divert what was going on the mortgage into KiwiSaver - at least until 2022.

By the way, the idea of buying out of Auckland is a good one for many people. But I suggest you rent out your home and rent in the new place for maybe six months or a year to make sure you like the shift. I know some people who have regretted it.

Question: Both my husband and I have the bulk of our retirement savings invested in separate KiwiSaver accounts but with the same provider.

Given that most of our eggs are in the same basket, is this something you would advise against? Should I transfer to a different provider to spread the risk?

Answer: I don't think that's necessary. In KiwiSaver, you're not investing in the provider itself. Instead, your provider puts your money in a wide range of external investments, and a separate supervisor makes sure the money goes where the provider says it goes.

What's more, the Financial Markets Authority keeps an eye on both the provider and the supervisor.

If a provider got into financial difficulties, that shouldn't affect members. Their accounts would be moved to a different provider, with all the money still in them.

Having said that, the government doesn't guarantee KiwiSaver. So it's not impossible that investors could lose money through skullduggery. Still, that seems highly unlikely.

Question: My husband and I are in our early 40s and have KiwiSaver growth funds with different providers. We recently sat down to have a good look at how they're performing according to the Morningstar KiwiSaver report and the Sorted.org.nz fees calculator.

I'm really pleased with my (top-ranking - yay!) fund's performance, but my husband's didn't perform as well - in some years his returns were significantly behind mine, and we note he'll end up paying over $2,000 more in fees by the time he reaches 65.

My question: Is the above enough to justify switching providers (most likely to the same as mine), and if so, is it risky to have both our retirement savings invested in the same fund, or are we better to use different providers to spread the risk?

Answer: Firstly, well done for reviewing your KiwiSaver investments - in particular, the fees. I wish more people would do that.

Also, well done for both being in growth funds. Unless you're planning a first home withdrawal, you have more than 20 years before you're likely to withdraw your money. And in a growth fund, over that period, you're almost certain to do better than in a lower-risk fund, despite ups and downs on the way.

You'll see from the above Q&A that I don't think it's a worry for both of you to be with the same provider.

I'm not totally convinced, though, that you've done quite the right research. Looking at how well KiwiSaver funds have performed in the past is not helpful.

Research shows that whatever has done well can easily turn around and perform badly. In fact some research says that's more likely. The funds that shine tend to be funds whose managers have taken more risk than average. And they are also the ones that can come a cropper sometimes.

On the other hand, it's good that you've taken note of the fees your two funds charge.

I suggest you use another tool on www.sorted.org.nz, along with the KiwiSaver fees calculator. It's the KiwiSaver Fund Finder. That will show you which funds, out of all the growth funds, have the lowest fees.

Check out the information on a few of the lowest, and consider moving to one of those.

MONEY WEEK

This year's Money Week runs from this coming Monday, September 3, through Sunday September 9. The theme is "Weather Life's Storms". Says the Commission for Financial Capability, which runs Money Week, "we'll be encouraging people to think about buffer savings accounts, insurance, wills, and other ways to deal with unexpected financial hits."

As in previous years, many different organizations will be running special events or services to mark Money Week. For more info, see www.moneyweek.org.nz

* 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.

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