kiwisaver worth a punt?

[rmbbrave]

Morgan plans a KiwiSaver clean up

Gareth Morgan, the bete noir of fund managers, is plotting a KiwiSaver ambush on the savings institutions he accuses of systematically acting against the interests of their savers.

"My agenda is to galvanise a cleansing of the practices they've pursued in the past," says Morgan, who registered Gareth Morgan KiwiSaver back in January 2005 - so early that he was able to reserve rights on the www.kiwisaver.com website.

His particular gripe is hidden fees and expenses that fund managers reserve the right to take. He says his KiwiSaver scheme is built on four key guiding principles, all designed to distinguish it from the kinds of "naughty behaviour" he accuses others of.

Morgan says his KiwiSaver will:


Have a single fee that covers all expenses incurred by the manager. There will be no "other fees" or "expenses".

Not have any capacity to create "reserves", which he says can later be acquired legally by the fund managers sneakily moving them onto the balance sheet.

Not have pooling and unitisation - this is essential if savers are to be able to see what they own and to independently verify the accuracy and honesty of those into whose care they have entrusted their savings.

Be properly diversified: "We won't parade a narrowly focused portfolio of NZ shares as somehow being appropriate as a long term savings vehicle."
But the rueful campaigner added: "I do wish the minister of finance had cleaned up this industry before putting in place a regime that is going to herd the unsuspecting into a raft of long term products that are not in their interest."

Morgan, father of TradeMe founder Sam Morgan, describes the past two decades of long-term savings in New Zealand as a tragedy.

"Both in New Zealand and internationally, it's been dominated by life insurance companies. The unfortunate consequence has been that many of the techniques of obfuscation and confusion this industry has used to befuddle life insurance policyholders have been migrated across to the management of people's savings.

"The net result is that savers have received lousy returns on their money (typically under 40 per cent of the returns actually made on those funds) and have ended up pretty disillusioned with the products and the ethics of those who have promoted them. In my view this has contributed in no small way to the flight from financial markets to residential property as a safe investment."

Morgan claims the most common techniques that have been employed to achieve the goals of the companies at the expense of the objectives of the savers have included:


Reserving: With long term superannuation-type products the "fund" has a life of its own. It is common for those running the fund to reserve monies for expected (and unexpected) events - such as tax changes, expenses changes, even to simply smooth returns between years. As soon as monies are reserved in this way, their ownership becomes confused and the line between any particular saver and the reserves gets blurred. Should savers switch their savings to other funds, they do not take a share of those reserves. There are then legal means for fund managers to acquire those reserved funds and feed their own bottom lines.

Unitisation: Funds typically block transparency for members by the use of units and unit prices to describe their value, says Morgan. The authorities in Australia have taken most of the big life insurers to task for mispricing units, he says, "and curiously in every case the mis-pricing has been in favour of the company". That adds up to a pattern of misbehaviour across the industry.

Hidden fees: Typically the fund will "headline" as low a fee as it can, but the effective total fee plus expenses will be far higher. Much happens behind the mask of unit pricing and is invisible. "It's not uncommon for products with headline fees of 0.5% to have an effective cost of 3%," says Morgan.

Diminishing the legal status of the client: Morgan says in setting up his KiwiSaver, lawyers offered trust deeds decl

[rmbbrave]

Who should invest in KiwiSaver?
Sunday Star Times | Monday, 23 April 2007

Everyone, says Money editor Rob Stock.

When KiwiSaver arrives on July 1, there'll be a big choice for people to make: whether or not to open an account.

For many it won't be a question with immediate priority.

Only those who shift jobs after this date to a firm large enough to be obliged by law to offer KiwiSaver will be forced to either have an account opened for them, or opt out.

Everyone else, including non-moving employees, the self-employed and even the nation's non-workers or part time workers under the age of 65 can make their choice at their leisure.

They'll be able to take out accounts at their banks, through insurance companies, or through their workplace, as Kiwisaver accounts will be as easy to open as bank accounts.

But who should open a KiwiSaver account? Everyone: There's a $1000 sweetener for every new account opened. Okay, savers don't get the money until age 65, but by then compound interest would have been at work. Assuming 2.5% real return (after fees - which are subsidised - and tax), that $1000 would have grown into $1131 after five years. After 30 years it would be worth around $2100. After 65 years, for an account opened for a baby, it'd be worth around $5000 in today's terms. Of course, once you open an account you are obliged to save either 4% or 8% of your gross pay into it, though those who do not want to do so could simply apply for a 12 month contributions holiday, and then when that ends apply for another and so on. The reality is, the $1000 might not survive a change of government, so take it while it's on offer.

People aged 60 to 65: For these people, opening a KiwiSaver account is a no-brainer. They're near to retirement, and so should be saving like billy-o anyway, so not claiming the free $1000, which they'll get their hands on in five years or less, would be criminal. If that means diverting some of their current regular savings into KiwiSaver, so be it. With the government fee-subsidies, it's a good value way to save.

Children: Yes, they too can have a KiwiSaver account, and damn well should, though parents will have signing rights. Why not get them that $1000 while it's there to be had. Those who do not earn (pocket money is not counted), won't have to save a thing as 4% or 8% of nothing is nothing. They'll need an IRD number, but parents can get them one of those within weeks of their being born. To really annoy your children, ask their grandparents to make Christmas and birthday contributions as gifts. Parents can also divert some of their kids' pocket money into KiwiSaver as well, another measure likely to irritate them, but teach them a valuable lesson. Much of what is written in the next category also applies to them.

Young-uns starting out at work, but aiming to buy a home later: Who wants to think about saving for retirement when they enter the workforce at 15, 18, or 21? Perhaps that's understandable, though many will be wondering how they can get some help taking their first step on the housing ladder. After three years, Kiwisavers who don't own a home will be able to withdraw their contributions to help with a deposit. Not only that, but the government will give them $1000 for each year they have saved money in the scheme, up to a maxi mum of $5000. Couples can double up, so that's $10,000 of free money (the $1000 sweetener they'd each get has to remain in place). Parents, don't let your kids mess this up. Open them an account at least five years before they could decide to join the workforce, so their inaction won't shut them out of this opportunity when they most need it.

People whose bosses will chip in free money: When was the last time you turned down an offer of free money? I suspect the answer is: "Never did, never would". But if your boss said he'd put $1 into a KiwiSaver account for every $1 you saved, would you? How people answer that question will determine whether KiwiSaver is a success or flop. AMP say about a third of businesses are considering

[rmbbrave]

When I move back to NZ next year...

I will be opening an account for my 2 year old. (She doesn't have to pay anymore after that)

Ka-ching! - $1000.

By the time she starts working she will have had the account for more than 5 years and would be able to get $5000 to buy her first house (assuming things don't change.)

For my <s>lazy</s> wife who doesn't want to work.

Ka-ching! - $1000. (She doesn't have to pay in any more money either.)

For myself. Ka-ching! - $1000.

I will have to pay 4% or 8% of my gross salary every year. Half of this will be tax free. I think I'll go for 8%.

Half of the money you put into Kiwisaver is tax free ("employer contribution"). All of the money you put into a DIY scheme is after tax dollars

Assume gross salary $50,000 = Net Salary of $38,590.

http://www.ird.govt.nz/how-to/taxrat...etaxrates.html

@ 8% You can put $4000 per year into Kiwisaver. If your employer reduces your salary to $48,000 + $2000 in "employer contribution" to your kiwisaver then you pay tax only on $48,000. Net salary is $37,290+$2000 = $39,290.

By joining Kiwisaver you are getting $700 more money a year . Did Lovegear include this in his above calculation?

Effectively Kiwisavers on a $50,000 gross salary get $4000 in their account per year but DIYers get only $3300 to invest any way they want. Kiwisaver have to pay $40 or so a year in fees but this still leaves them $660 (or 20%} more a year than DIYers.

Most people on sharetrader claim to be better than Fund managers but surely even the most widely optimistic are 20% better every year.

I was loathe to give my money to WayneKerrs like ING, AMP, AMP & ASB etc to manage, but someone like Gareth Morgan - now that's a different story altogether.

Other possible benefits.

In the unlikely event that we don't buy a house in our first five years after living in NZ we get $10,000 (5k each) from the Govt to do so.

[minimoke]

RMB a few slight problems with your cunning plan.

You (or some other mug) will have to cough up an extra $1,000 in tax to pay for your 2 year olds contribution – same with your wife. Your own personal tax will just be a money go round – pay an extra grand in tax; get it back as Kiwisaver.

Sure in a few years you’ll potentially be able to able to get your deposit subsidy. Except of course this money doesn’t grow on trees – you’ll have to front up with $10,000 in extra taxes somewhere along the way.

Of course you’ll be saving with a KiwiSaver scheme who will take advantage of the government fee subsidies – but yet again money in = tax out.

But here’s the killer. When you buy your house you might firstly want to take out half your savings to go as the deposit. Your KiwiSaver scheme is going to have conniptions when it looses half its fund. What will they do – but put up their fees. Your net return on your Scheme is going to be worse so what will you do. To get a better return on your cash you’ll put half your Kiwisaver contributions in to the mortgage repayments. Brilliant – except your kiwisaver provider has now also lost half their revenue stream.

Oops. So what will they do – they can’t go into higher risk investments so they will have to put up their fees. Now you are probably in a negative return situation with your Kiwsaver provider so what do you – go on a contribution holiday of course. Except your KiwSaver provider is now totally knackered and they will end up going to government for assistance which can only mean your taxes will go up.

[rmbbrave]

I think Cullen is trying to give NZ kiwisaver instead of tax breaks.

He is trying to give almost everyone under 65 $1000. It could add up to $3,000,000,000 over 30 years or so and that is not including future NZers.

[minimoke]

Add to this another $3,000,000,000 in home deposit assistance. And this coming from a government that wants to cool the housing market! And does anyone else see the other irony with a Labour government who provides even more tax benefits to the rich through the Kiwisaver Salary Sacrifice and PIE provisions.

[CJ]

Starting to look better. Might use as the conservative portion of my investments (currently have a few index funds).

Minimoke - Sure all this giving by cullen has to be paid by taxes so I may aswell take part in the hand out (better to give with one and receive with the other rather than give with both).

Will withdrawl all (that I can) in 3 years to buy "first house" and start again (to keep my conservative investments a low %). Again, if there are going to be any distortions, I may as well be the one creating them rather than being negatively effected by it.

The Kiwisaver chagnes are now law so we need to figure out how to take advantage of them.

[CJ]

quote:Originally posted by rmbbrave

When I move back to NZ next year...

I will be opening an account for my 2 year old. (She doesn't have to pay anymore after that)

Ka-ching! - $1000.

By the time she starts working she will have had the account for more than 5 years and would be able to get $5000 to buy her first house (assuming things don't change.)

Why not put in $1000 per year (no need for gift thing to IRD or wont count towards the $27k) and the government will match the contribution? Does that work?

[skinny]

quote:Originally posted by CJ

quote:Originally posted by rmbbrave

When I move back to NZ next year...

I will be opening an account for my 2 year old. (She doesn't have to pay anymore after that)

Ka-ching! - $1000.

By the time she starts working she will have had the account for more than 5 years and would be able to get $5000 to buy her first house (assuming things don't change.)

Why not put in $1000 per year (no need for gift thing to IRD or wont count towards the $27k) and the government will match the contribution? Does that work?

As said on the Govt. budget thread, I checked it out and it appears that the government will match up to $20 per week to kiwisaver accounts for non wage/salary earners under 65. I certainly intend to take this option for my kids while it lasts, but I suspect it will not last long (There are around 1.5m kids in NZ...so the ongoing fiscal costs get pretty big if sufficent numbers of parents are rational and take the option.) AMAZED the media has not picked this up yet!!

I hold a few index funds so also see kiwsaver as a substitute for them. Apparently ASB will offer passive index funds so will look at that first when the details are released in July.

[CJ]

How does the credit to companies work.

If you have two jobs, and both employers pay into your scheme, do they both get a credit from the government. What if you have a few companies yourself (say set up for investment properties).