I currently contribute 10% to KiwiSaver, is it beneficial to lower this and invest elsewhere? I’m a first time wannabe investor in shares, where should I start? Should I pay down the mortgage ASAP or invest in shares? What was your reason for switching from Kernel’s Global 100 Fund to their Global ESG Fund? These were some of the questions we answered in our 7th Ask Money King NZ Q&A held with our Instagram followers.
The answers in this article have been provided without any knowledge or consideration of the personal circumstances of the person who asked the question. This content should not be taken as financial advice.
In case you missed it – Our previous Q&A article:
– Ask Money King NZ (Winter 2023) – Should I be worried about using a BBB rated bank?
1. I currently contribute 10% to KiwiSaver. Is it beneficial to lower this and diversify or invest elsewhere?
When contributing to KiwiSaver as an employee, it’s possible to choose contribution rates of 3%, 4%, 6%, 8%, or 10% of your pay. If you’re currently contributing 10% you could choose to lower your contributions down to 3% for example, then invest 7% of your pay into a non-KiwiSaver investment. Key benefits of investing this 7% outside of KiwiSaver are:
- Flexibility – Money invested in KiwiSaver can typically only be withdrawn when you retire or buy your first home, while non-KiwiSaver investments can be sold at anytime. Some might argue that there’s no need for such flexibility if you’re saving to buy a house for example, however, circumstances can change. You might end up inheriting a house or moving in with a partner who already owns a house, at which point you might no longer want to buy a house (which would subsequently result in your KiwiSaver locked up until age 65). By keeping your money outside of KiwiSaver, you could repurpose it for another financial goal.
- More investment opportunities – The majority of KiwiSaver investments are also available as non-KiwiSaver investments. For example, Kernel offers their High Growth Fund as both a KiwiSaver fund and a non-KiwiSaver fund. In fact there are more investments opportunities outside of KiwiSaver, like more funds to choose from and the ability to invest in individual assets (like shares, bonds, property, crypto) without any restrictions.
But be aware of the caveats of reducing your KiwiSaver contributions:
- Your regular KiwiSaver contributions force you to invest. If you reduced your contribution rate from 10% down to 3% for example, you might be tempted to spend the 7% instead of investing it. Though setting up auto-invest functionality with your investment platform may help you stay disciplined.
- The restrictions on when you can use your KiwiSaver money might actually be a good thing for some people, as it prevents you from dipping into your KiwiSaver money easily.
- Some employers might match your contributions at a higher rate (e.g. match your own contributions up to 6%). Therefore you may want to contribute more than the minimum of 3% in order to max out your employer contributions.
- If your income is low (e.g. you’re working part-time), contributing the minimum 3% might not be enough for you to get the maximum government contribution. Therefore you might want to increase your contribution rate to ensure you max out the government contribution.
– KiwiSaver 101 – How does KiwiSaver fit into your investment portfolio?
2. Would you pay off your student loan considering it’s interest free in NZ?
The financial benefit of having a student loan, is that it’s interest free money that could be used elsewhere like invested in the markets to make a return, or to pay off other debt. For example, let’s say you had a spare $1,000. Instead of paying off the loan (which won’t save you any interest as it’s interest free), you could put that $1,000 into a bank deposit to generate around 5% p.a. in interest income. Another benefit of paying a student loan off as slowly as possible is that inflation will gradually make the loan “smaller” – A $50,000 loan won’t be worth as much in 10 years time due to the diminishing purchasing power of that money.
However everyone’s different. Some might like the feeling of clearing their debts, no matter what the interest rate is. Others might be considering moving overseas, at which point interest can start getting charged on student loans. You also might be considering buying a house, and in that case having a student loan will usually reduce your capacity to borrow money for your home loan. So there’s a few factors to think about when deciding on how fast or slow to pay off that student loan.
3. Should my partner and I combine our investments to accelerate reaching our goals?
There doesn’t tend to be a financial benefit to combining investments. Two $5,000 investments will deliver the same returns as one $10,000 investment (assuming equal tax rates). Let’s look at the following example scenarios:
- Scenario 1 – You and your partner keep your investments separate. You invest $5,000 in a fund, and your partner invests another $5,000 in a fund.
- Scenario 2 – You and your partner combine your investments, resulting in $10,000 invested in one fund.
If each fund made a return of 5% per year and we compounded the returns, here’s how much money we’d end up with in each scenario:
|Year 0||$5,000 + $5,000 = $10,000||$10,000|
|Year 1||$5,250 + $5,250 = $10,500||$10,500|
|Year 2||$5,512.50 + $5,512.50 = $11,025||$11,025|
|Year 3||$5,788.125 + $5,788.125 = $11,576.25||$11,576.25|
In either scenario, after 3 years we’ve ended up with the same total dollar amount of $11,576.25.
However, there’s still at least a couple of possible advantages of having joint investment accounts:
- You could save a little bit on fees if the investment platforms you’re using charge some kind of fixed fee (as opposed to percentage based fees). Take Kernel for example, where you’ll pay a platform fee equivalent to $60 per year if you invest $25,000 or more in their non-KiwiSaver funds. Combining investments could mean paying just one set of platform fees.
- Potential non-financial benefits, such as having a sense you’re working closely together towards a goal, or having greater accountability towards each other.
We personally use a mix of individual and joint investment accounts. But different couples have different systems in place for their finances, so there’s no definitive answer!
4. Thoughts on the 1.4% p.a. FIF tax drag and whether a reform is needed? Kiwis seem unfairly taxed.
For those who don’t know, FIF tax is a special set of tax rules that apply to overseas investments. We won’t get into the detail of how it works (you can check out the article below if you want to learn more), but basically investors in PIE funds that invest in overseas shares need to pay around 1.4% of their fund’s value in tax each year (5% FDR x 28% PIR = 1.4% tax liability), regardless of how much the fund increases or decreases in value.
– Tax on foreign investments – How do FIF and Estate Taxes work?
We wouldn’t necessarily call the FIF tax regime unfair. Take the following scenarios for example:
- Bob invest in NZ shares and earns 5% in dividends, and 1% in capital gains
- Natalie invests in US shares and earns 1% in dividends, and 5% in capital gains.
Without FIF, Bob could be penalised by investing in domestic shares, which tend to pay higher dividends so potentially attracts more tax (as opposed to capital gains which aren’t usually taxable). FIF makes it fair for NZ share investors and incentivises local investment by ensuring overseas share investments (which tend to pay less dividends) still incur some form of tax.
But we think it would be reasonable for the rate at which FIF tax is applied to be reviewed, especially with the rise in Kiwis investing their money in KiwiSaver and managed funds as a way to grow long-term wealth and invest for retirement. 1.4% is a fairly sizeable wealth tax on overseas investments (which are a necessity to invest in for global diversification because the NZ market is so small). We don’t have the answers for what FIF tax should look like but potential solutions are:
- Adjusting the FDR rate, for example, changing it from 5% to 4%. This would reduce the annual tax impact from 1.4% to 1.12%.
- Allowing funds to use the CV method to calculate their FIF tax liability. This would result in a lower tax impact on investors in years where their fund made a low return or loss.
5. If I received an inheritance, should I invest in shares or property?
Both are valid long term investments, but there’s no right or wrong answer as to which one you should invest your inheritance money into. It’s a bit like asking whether you should have eggs or cereal for breakfast – different people will have different preferences and needs.
Some people love property. You can borrow money from the bank to leverage, it’s less volatile than shares, and it seems like more people are able to grasp the concept of being a property owner/landlord versus being a shareholder.
On the other hand shares are more hands off (you don’t need lawyers, property managers, and agents etc.), are quicker to buy and sell, and allow you diversify your money easily (e.g. through an index fund).
So the decision on whether to invest in property, shares, or both will require a bit of your own research and thinking. Perhaps some advice from a professional adviser could help. Lastly, the fact that it’s inheritance money shouldn’t have a bearing on the decision (unless the person you inherited the money from left specific wishes for how they’d like the money used). In other words just because it’s inheritance money (as opposed to money you saved up yourself), doesn’t mean it needs to be invested in a certain way.
– Property vs Shares – The pros and cons of buying residential property
6. Is a 25% portfolio allocation to the NZ sharemarket too high given how small our economy is?
The New Zealand market is tiny. It makes up something like 0.2% of global sharemarkets, so allocating 25% of your investment portfolio towards domestic shares is significantly overweighting the local market relative to global shares.
But there’s often good reason to have a home bias. Due to imputation credits paid by many companies and the lack of FIF tax, NZ shares tend to incur a lower tax liability compared with overseas shares, providing a roughly 1% p.a. head start over investing in foreign companies. The NZ market is often less expensive to access than foreign markets because there’s no foreign exchange fees to pay nor are there currency hedging costs. And if you’re investing in individual shares, it might be easier to understand and research local companies compared to foreign companies.
The average Aggressive KiwiSaver fund has a 25% allocation to NZ assets, showing that even professional fund managers have a home bias. But as we often say, there’s no right or wrong answer and different people have different needs and preferences. Perhaps you could use that 25% average as a starting point for how much of your portfolio you allocate to NZ shares, and adjust that up or down depending on what you feel is right for you.
7. I’m a first time wannabe investor in shares. Where should I start?
The first step is to probably think about your financial goals – Why do you want to invest in shares in the first place? Too often we see wannabe share investors get into it for the wrong reasons, such as wanting to get rich quick, or grow their wealth over the short-term (like 1-3 years). If this is the case, shares might not be right for you. However, if you’re genuinely wanting to build wealth over the long-term (5+ years minimum), then share investing could align perfectly with your financial goals.
After that we would just start! Sure you can do lots of learning and research to pick the very best platforms and investments, but there’s so many options and so much to learn that you’ll just end up with analysis paralysis. If you try to learn everything before you start, there’s a good chance you’ll end up never starting at all! So we’d start with a very small amount of money into a reasonable looking investment and learn along the way. Then over time you can refine your strategy, and increase the amount you’re investing.
Funds can also be a great place to start as they save you from having to pick individual companies to invest in – Ideally a diversified fund like a high growth or growth fund where the fund manager allocates your money into shares of multiple companies operating across a wide range of countries and industries. If you’re looking for some more inspiration on where to start, check out our article below:
– 4 steps to create an incredibly simple long-term investment portfolio
8. What was your reason or thought process to switch from Kernel’s Global 100 Fund to their Global ESG Fund? More diversification?
We moved from Kernel’s Global 100 Fund to their Global ESG Fund back in July mainly due to portfolio diversification. The Global 100 Fund is adequately diversified, but still has a heavy concentration towards tech companies, especially Apple and Microsoft (which together make up around 27% of the fund!). For us that meant tens of thousands of dollars invested in these two companies alone, an amount that would rapidly grow as we contributed more into our index funds. Switching to Global ESG gave us slightly better sector and geographical diversification, and spreads our money across more companies.
|Global 100||Global ESG|
|Number of constituents||100||788|
|Number of countries||10||24|
|Weighting of top 10 investments||56.27%||26.34%|
|Weighting of US investments||74.5%||67.3%|
|Weighting of IT sector||36.7%||24%|
Now we can scale up our portfolio confidently without feeling like it’s being dominated by two companies. We briefly explored switching to Simplicity’s Global Share Fund to achieve this diversification, but stuck with Kernel (despite having slightly higher fees) due to the better transparency of their funds, having other useful funds on the same platform (like their Cash Plus and High Growth Funds), and being happy with their service and app in general.
But increased diversification wasn’t the only driver. We also took the opportunity to make a few other adjustments during the switch:
- We split our global shares exposure to 50% hedged and 50% unhedged, whereas previously we were fully unhedged (because we started investing with Kernel before they released currency hedged versions of their global funds). This is to align our portfolio with how a lot of fund managers hedge their funds, and so we don’t have too much of our portfolio affected by the performance of the NZ dollar.
- We also sold off some satellite funds like Dividend Aristocrats and Moonshots Innovation, reinvesting them into Global ESG. We originally bought those funds to diversify away from the Global 100, but the extra diversification Global ESG provides made these funds somewhat redundant for us. In our view the simpler our portfolio is, the better.
- We rebalanced our portfolio. Our Global 100 Fund had grown in value substantially relative to our other funds, so we trimmed down the amount invested in our global index funds, then redistributed the money into our other funds to ensure our holdings align with our target asset allocation.
9. How have you set up your mortgage?
We purchased a new build property so took advantage of ANZ’s Blueprint to Build floating rate deal. This gives us a 2.76% discount on the normal floating rate of 8.64% for 2 years, leaving us with a current interest rate of 5.88% (note this particular deal is no longer being offered to new customers). We got some funny looks from the lawyers for going 100% floating in a rising interest rate environment, but it’s worked well for us so far:
- We’ve enjoyed the flexibility of making extra lump sum repayments without any limits, and have already paid off tens of thousands of dollars of the loan early.
- It’s unlikely interest rates will go up much further. But if they do go up we worked out we can comfortably afford repayments at an interest rate of up to 7.70%, without substantially changing our budget.
- Our discounted floating rate of 5.88% is working out cheaper than if we had chosen to go on fixed rates (we were also offered fixed term rates of between 6.25-6.45% at the time we bought our house). This will continue to be the case unless interest rates increase substantially.
As for what we’ll do when the Blueprint to Build discount expires, that’s a problem for 2025 😂. Though we anticipate moving onto fixed terms, and hopefully by then the rates will have come down.
10. Is there a difference in the long-term if I invest in a NZ based fund (like the Smartshares US 500) vs a US based fund (like the Vanguard S&P 500)? Is one superior or should I diversify across both?
Yes and no. Both NZ and US versions of the same index fund invest in the same underlying companies. For examples, an S&P 500 index fund contains the 500 largest companies listed in the United States, regardless of whether you invest in the Smartshares or Vanguard version of that fund. Therefore the companies inside each fund will deliver the same performance, and there is no diversification benefit to investing in both.
However, looking beyond the underlying assets of the funds, there are some key differences to each option:
- Fees – US funds tend to have lower management fees (e.g. 0.03% for Vanguard S&P 500 vs 0.34% for Smartshares US 500). However, NZ funds usually have lower or no transaction fees and no foreign exchange fees. So there is no obviously cheaper option when it comes to fees.
- Tax – Both are subject to slightly different tax treatment with NZ funds being PIEs and US funds being FIFs. There is no definitive best between these structures, and the most tax efficient will ultimately depend on your personal circumstances.
- Currency – When you invest in the S&P 500, exchange rate fluctuations can impact your returns. This will even be the case if you invest in a NZ domiciled fund that isn’t currency hedged. However, some NZ fund managers offer currency hedged versions of the S&P 500 which remove the impact of currency movements. Currency hedging to the NZ dollar isn’t available with US domiciled funds.
These factors are relatively minor in the grand scheme of things and are unlikely to make a big difference in your results over the long term, so we’d would just pick what you’re most comfortable with. We cover these differences in more detail in the articles below:
11. Should I pay down the mortgage ASAP or invest in shares?
This one’s a bit like the pay off student loan vs invest in shares question, but with the key difference being that mortgages incur interest so there’s more incentive to pay them off. From a financial perspective the best option depends on which provides the higher return. Mortgage interest rate higher than return on shares? Then pay off the mortgage. Return on shares higher than your mortgage interest rate? Then invest in shares.
However, there’s more to consider than just financials. While the return on shares should outperform mortgage rates over the long-term, they’re volatile and might not do as well as you expect in some years. Paying off the mortgage provides a risk free and tax free return (in the form of no longer incurring interest on the amount you’ve paid down). There may also be the psychological benefit associated with getting closer to being debt free faster.
On the other hand, by paying off the mortgage you may be concentrating your wealth towards your home. Investing in shares allows you to build wealth in other areas away from your house. You may also find that share investments are more flexible. You can easily sell off small portions of your shares to pay for retirement or other goals, while it’s generally harder to access equity locked into a home.
But if you’re struggling to decide, why not do both? There’s no rule saying you have to choose between one or the other. You could put some money towards extra mortgage repayments and some towards a share portfolio, giving you the best of both worlds.
12. What proposed financial policies concern you the most in the upcoming election?
As we approach the 2023 NZ General Election, we’ve been seeing plenty of interesting policies from the various parties. Examples are:
- Labour’s proposal to remove GST off fruit and vegetables.
- Labour’s plan to increase fuel excise tax by 12 cents per litre over 3 years.
- National’s KiwiSaver tweaks, allowing you to split your money across multiple providers, and allowing it to be used to pay for rental bonds.
- National’s income tax bracket adjustments, which would effectively result in a small tax cut for most income earners (given more of your pay would fall under lower tax brackets).
- ACT’s simplified system of having just two income tax brackets.
- Both National and ACT wanting to phase back in interest deductibility on rental properties.
- The Green Party wanting to introduce a wealth tax of 2.5% an individual’s net assets over $2 million, accompanied by income tax cuts for anyone earning less than $125,000 per year.
- TOP shaking up income tax brackets so that low and medium income earners would pay less tax, and shifting the tax burden to residential land owners by introducing a land value tax of 0.75%
But nothing in particular stands out or concerns us so far. Labour and National’s policies are really just minor tweaks to the current system. However, we would like to see these major parties tackle tricky topics like whether to increase the superannuation age and whether we need wealth taxes or universal basic incomes, instead of just sticking with the status quo and kicking the can down the road. The likes of Green, ACT, and TOP have more radical policies that address some of these topics, but as smaller parties their ideas are less likely to be implemented.
But we don’t like to worry about politics too much because regardless of which party is in power and what policies they implement, it’s still up to ourselves to achieve our financial goals. It’s up to us to work with whatever policies/rules/taxes are in play at the time to reach our goals, because hoping a certain party gets in to change the system in our favour won’t work in getting us there. In order words the government isn’t going to make us rich – but rather it’s your individual effort that will.
Follow Money King NZ
Join over 6,800 subscribers for more investing content:
The content of this article is based on Money King NZ’s opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with an authorised financial adviser before making any investment decisions.