Mary's Money column appears in the
Business section in the Weekend Herald.
NZ Herald 30 July 2011
Q&As: Two questions to ask before trading up to a more expensive house
- A pilot joins the call for annuities for retiring KiwiSavers
- Mercer explains its alternative to conventional annuities
- A KiwiSaver provider gives children a break on fees
- A reader is taken aback over a headline about steady incomes - and I'm taken aback that she cares!
Question: What do we do? We would love to move to a larger section in the inner city.
We currently live in Arch Hill in a four-bedroom villa mortgage-free and have a bach on Waiheke on which we owe the bank $150,000. I earn $100,000, and my wife stays at home looking after two babies.
Our dilemma: do we stay put under no financial stress or look to move and spend another $200,000 to $300,000 and combine both mortgages.
I guess we would have to sell our house before we look, as most houses are for auction.
Answer: Ask yourselves two questions. The first is: Can you cope with a bigger mortgage?
The mortgage repayment calculator on www.sorted.org.nz shows that monthly repayments on a 25-year $300,000 mortgage at 7 per cent would be $2120, and at 8 per cent they would be $2315. Those interest rates are higher than currently, but it would be a mistake to count on rates not rising.
I suggest you transfer $2300 a month into a savings account for, say, six months, to see if you can get by without it.
If it's too hard, stick with your current property. But if you can manage, use the saved money for a deposit on your new place.
The second question is: Would you be forced to sell the new house if you lost your job and were unable to meet mortgage payments?
Forced property sales can turn dreams into nightmares. They tend to happen in downturns, when house prices may have fallen and buyers are scarce. Desperate sellers can end up accepting horribly low prices.
In your case, though, there seem to be a few escape routes. You might be able to get another well paid job. If not, perhaps your wife could get a part-time or full-time job. Or you could sell the bach. Or maybe family members could help you out.
Nobody should take on new debt without thinking through the gloomy stuff - especially in these rather iffy financial times.
Still keen? Then go for it. It would be lovely for the littlies to have more yard to play in.
But you're quite right that it's best to sell your house before you buy. It's even harder than usual to guess what you'll get for your place, and the last thing you want is a new mortgage of half a million.
Another option is to look around while your house is listed for sale, but to buy only on condition that you sell for at least a certain amount.
True, you can't do that if you're buying at an auction, but you could make a conditional offer on a house that doesn't sell under the hammer. But no getting carried away and bidding if you haven't sold first, okay?
Question: I totally agree with you about annuities.
I am an airline pilot with Air New Zealand and we are quite good at landing an aeroplane in thick fog at Heathrow airport. What we are not good at is managing a large cash sum when we retire, as we don't have the acquired skill.
I would far rather have an annuity that would last until I pass away, and perhaps my wife would have 60 per cent of it until she does the same. I would be happy to support a drive toward the re-introduction of annuity schemes.
Answer: Great to have you onboard!
For those who missed last week's column, I'm encouraging KiwiSaver providers - beyond Fidelity Life who already does it - to come up with annuities or similar for people withdrawing KiwiSaver money in retirement.
The first such withdrawals will take place in July next year. For the reader who said I wasn't clear about it last week, the retirement withdrawal age is either NZ Super age - currently 65 - or five years after the joining date, whichever comes later. So those who can access their money next year joined in 2007 aged 60 or older.
When someone buys an annuity, they give a life insurance company a lump sum and the company gives them monthly payments until they die. As you point out, this removes the need for financial expertise in retirement.
Annuities often come with features including the one you mention. A couple buys an annuity and the longer living spouse receives a portion of the payments after the first spouse dies. Next week we'll go into some of the other annuity bells and whistles.
Question: When I worked on Mercer's "Securing Retirement Incomes" paper in 2009, I advocated the concept of NZ Super Plus, and this was referenced in some of the taskforce documents and by Susan St John.
I really believe NZ Super Plus is the only way a viable annuity (and later a potential market) will ever evolve in New Zealand.
Answer: I found that paper thoughtful and helpful. So I've asked Martin Lewington, head of Mercer New Zealand, to summarise the paper and his views on annuities.
"We need to create a viable and efficient market in retirement income products, otherwise KiwiSaver is likely to fail in its objective of enabling New Zealanders to enjoy a dignified retirement," says Lewington.
Along with annuities, "Allocated pensions are another common option. This is where an income is drawn down gradually from the retirement savings which are housed in an investment account (similar to KiwiSaver) while the remaining balance continues to attract investment returns."
The trouble with those, as mentioned last week, is that you can draw down too much and run out of money, or too little and not have as nice a retirement as you could have.
But annuities have their problems too. Lewington goes on to say, "While there are benefits in developing a stronger annuity market in New Zealand, Mercer acknowledges the use of annuities globally is in decline. Several factors including increasing life expectancy are making annuities a high risk / low margin product. Without government action in the area of taxation or compulsion, we are unlikely to see any further market activity."
As an alternative, Mercer proposes the introduction of NZ Super Plus. Under that scheme, people could use some or all of their KiwiSaver savings to get higher NZ Super payments from the government.
This would be similar to receiving ordinary NZ Super - which is like an annuity in that you get regular payments until you die - plus payments from your own private annuity. However, says Lewington, it has several advantages. "The government acts as the insurer and carries the investment risk. This would help to manage costs for retirees and provide greater protection against market risk and unexpected high inflation."
Boosting the government's risk might not have much appeal to politicians. But there's got to be a price at which the government would receive enough KiwiSaver money to compensate for the risk, while retiring KiwiSavers would think they got a fair deal.
Lewington adds that "the link with NZ Super would make the concept easier for investors to understand." A good point.
Here's hoping the government picks up on either this idea or other encouragement of annuities or similar.
Question: Just read your last article. When looking for somewhere for our kids to sign our grandkids up to KiwiSaver, we decided on Westpac. They charge no fees for account holders under 18 as long as you make one deposit to the account each year. That amount can be whatever you choose.
Answer: That's almost right. The child has to have both a Westpac savings account and a Westpac KiwiSaver account, says a spokesman.
To have the KiwiSaver monthly admin fee of $2.59 waived, "they need to make a deposit (of any amount) each calendar year to the Westpac savings account." So the deposit doesn't go into KiwiSaver, but into the other savings account.
Clearly this helps out with the problem we discussed last week, in which the $1000 kick-start in a child's KiwiSaver account could dwindle if there are no new contributions and the fees are higher than returns. While that seems unlikely, it's possible.
The only other KiwiSaver provider I know of that gives kids a break on fees is Aon, which lowers its annual admin fee from $50 to $40.
Some other providers offer a different break for children, accepting lower minimum contributions than from adults. But this is not a big deal, given that other providers accept zero from anyone of any age.
Question: As a regular and respectful reader of yours, I must say I was totally taken aback by your recent headline, "Advisers need steady income too." Why? What's so special about them?
As a supposedly savvy woman, I presumed you would be aware that there are many thousands of us out here now who do not have that luxury. How about farmers, horticulturists, retailers, contractors and the many persons running their own business?
Then there are landlords of both residential and commercial properties, reliant upon continuation of tenancy, which they may not have. Or how about those counting on interest or dividends from capital invested? Does that not vary too?
Only the wage earner can be relatively sure of that regular amount being deposited into their account, and they, too, can lose their jobs.
There are plenty of us out there who have to live, and cope, with uneven incomes already, so I guess financial advisers must be amongst the lucky ones. It seems you must be too, as you seem so blissfully unaware of how it is to live like that, and how many do.
Answer: I know well what it's like to live on a changeable income. All my sources of income stop and start. Even the column pay stops over the Christmas break. It's not ideal, but I budget for it, and I'm sure the farmers, retailers and others on your list do too.
Many financial advisers also receive lumpy income. But if they did what the correspondent in the Q&A in question was proposing - setting their fees so they fluctuate with returns on clients' investments - the ups and downs would be extreme. I was merely saying that many people wouldn't like that - a point with which you seem to agree.
However, I don't write the headlines. Perhaps the person who did should have said, "Advisers wouldn't like wildly fluctuating income", but that wouldn't have fitted.
It's not easy summing up a story in just a few words, and what was there seemed fine to me. In fact, I was rather taken aback that you felt cross enough to write about it. So I guess that makes us even!
• Mary Holm is a freelance journalist, part-time university lecturer, 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 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 firstname.lastname@example.org 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.