Currently there are nine KiwiSaver providers who are a ‘default’ provider. Among a range of funds they manage, they have on offer a ‘default’ fund. Each provider has a term of 7 years to enjoy that status. Every seven years a competitive tender helps choose a new group.

There were five default providers chosen when KiwiSaver launched in 2007. The current group of nine providers was chosen after the review undertaken in 2014.

Encouraging lazy investors

There are around 25 KiwiSaver providers in total. One of the unintended consequences of having a system of designating a handful of providers as ‘default’ is that it has resulted in a cohort of lazy investors.

It has also created a lop-sided provider market with the default providers collectively managing a significant majority of the $60 billion in KiwiSaver savings. This raises concentration risks for the KiwiSaver initiative as a whole.

Most people find decision making hard. More so when the decision is about investments and finances. As a result, a fall back option is appealing considering the IRD randomly allocates an undecided member to one of the default funds. As such, it is not surprising that the default provider system has partly been responsible for a culture of laziness.

Digging the hole deeper

In the current round of submissions, one of the suggestions raised is the idea of choosing a new cohort of default providers and then to transfer existing default members across to the funds managed by the new cohort of providers.

This suggestion, as well-intentioned as it is, raises a number of issues.

A mass transfer will come at considerable administrative costs. You will likely bear this cost. Fair to say, it will be a one off cost, but a drag on your returns nonetheless.

Additionally, a mass transfer away from an existing pool of providers to a new cohort of providers on any basis makes it grossly unfair to the current providers. These providers have gone to considerable lengths over the past years to sign up members and invested in encouraging existing default members to make active choices.

A new default provider will have an unfair advantage in this instance given they effectively enjoy a free lunch at the expense of current providers.

Closing the gap

A more elegant solution would be to do away with the system of ‘favouring’ a handful of providers with a default status.

The first determination should be how fit for purpose a provider is to manage our life savings. If a provider is not fit for purpose then they should not be allowed to operate. On the other hand, if they are fit for purpose, then place obligations on them to:

• create a fund in their suite of products to be a ‘default’ fund. Those members who don’t make an active choice get allocated to this fund.
• engage/ educate the member in moving them into an appropriate fund, within a mandated time-frame.

This approach eliminates most of the challenges with the current default system.

Interested?

One observation is pretty obvious from the above. Your future is truly being determined by folks you don’t even know exists, if you are a default KiwiSaver member.

Get involved if that thought concerns you. Spare a thought for how your money is invested. We have made it super easy for you to make an informed decision– just click here!

The post KiwiSaver default member? Someone’s deciding your future for you appeared first on PocketWise.

Yet, financial freedom does not come around by accident. Being financially free takes a whole lot of discipline and some bit of know-how. Putting aside little amounts of your savings over the long term makes a significant impact to achieving your financial goal. The sooner you start, the sooner you become financially free. The more disciplined you are about this the better is your chance of success.

When it comes to know-how, diversification is a strategy that is critical to building a savings pot for the future.

Spreading your chance of success

Diversification simply means not having all your eggs in one basket. That is to say, avoid having all your money invested in the same thing, in the context of financial planning. For instance, you may be convinced about the prospects for retirement village operators. On that basis, you then invest ALL your savings into the shares of one of the businesses in the sector. If you had a guarantee that the particular business was going to be a winner, it should be fine.

Unfortunately, when it comes to investing there is always an element of risk. The risk being that the outcome you are expecting does not eventuate, or in other words, you suffer a financial loss.

Protecting your portfolio from large losses is imperative to achieving your long-term financial goals.

Dealing with an unpredictable future

Investment risk can arise for a number of reasons. As per your determination, the business you have chosen to buy shares in may very well be well run and set for fantastic growth into the future.

But, a change in legislation or a sector wide issue impacting all businesses in that sector can drag its prospects down at any time. Alternatively, issues in the wider economy locally or globally can mean that your shares lose value.

Risks of this type are referred to as being ‘systematic’. Meaning, risks to the wider “system” or in this context, it refers to the general investment climate. Systematic risks are harder to avoid. Risks emerging may also be specific to a type of financial asset. When shares are falling in value, the prospects for bonds may be looking more favourable.

Why is this important for growing your investment portfolio over time?

A well-diversified portfolio will have a mix of different assets. It will have some amount of shares, some bonds, some in a call account, some in property etc. The idea being that, should one of these types of assets perform badly the others in the portfolio should compensate for that. As a result, your overall investment portfolio may not suffer from large losses.

Tips on diversifying

The idea then is to have the right mix of the different types of assets you are able to invest in. Different types of assets perform differently through market cycles. The more the individual assets vary from one another over time, the safer your investment portfolio is likely going to be.

Remember, if your investment portfolio includes managed funds, (such as KiwiSaver funds) you should look through to see what types of assets the fund is invested in. From the perspective of diversification, you should consider investing your non-KiwiSaver savings in assets that are not in your managed funds holdings.

As an overarching principle, consider having more stable assets such as bonds and term deposits in your investment portfolio as you grow older and near your horizon for a financially free future.

The post Securing a financially free future appeared first on PocketWise.

Today a 3-year term deposit will earn you just 3% on average. That is less than half what you would have earned on a similar term deposit just 10 years back. Of further concern is that today the outlook favours further cuts to the interest rates. That will invariably lead to even lower returns from your term deposits.

Looking back in history, it is times like these (low-return investment environments) that the incidence of investment scams tick up in volume and craftiness. The fact is that there is always a risk return trade off.

It’s up to you to be smart about where you invest your hard earned money. Thankfully, there are a number of tell-tale signs to identify such rip-offs. The fact that the medium for propagating scams is broadening from cold calls and emails to social media messaging and ads, the red-flags are still the same.

Here are just a few:

Exclusive or By Invitation only

Someone is trying to sell you an investment product that they purport is open only to a select few. Think again, what makes you special enough to be invited as one of those select few? Investment proposals that are by invitation only should be a red flag right away. It is very likely that they don’t want to advertise it in public in fear of being exposed.

Time Bound

Especially strangers or new acquaintances trying to sell you an investment that needs you to make a decision today or tomorrow. Don’t be pressured into an investment that you are not familiar with. At the least, take the time to discuss it with at least one other confidant. Which leads to the next red flag.

Confidential and private

You are likely being taken for a ride if the individual selling you the product insists that you keep it to yourself. If the success of the product is predicated on you keeping it a secret, it is probably a dud anyway.

Cold Calling

If you receive an email or a phone call from strangers about investment products, be super cautious. It doesn’t matter they direct you to a website. Or, if they identify themselves and the company they represent. It doesn’t matter they talk about how successful other investors have been. Creating sham websites is easy. Names of individuals and businesses can be made-up and success stories of other investors are simply that – stories. It is illegal in New Zealand to sell financial products through cold calling, or if you haven’t requested information about it.

Other less-obvious red flags

There are a number of other red flags, but probably not as obvious as any one or all of the above. Higher returns tend to come from putting your money in higher risk investments. So, be wary of high return investment products that allegedly have very low risk. Typically, the two don’t go hand in hand.

This observation is harder to pick up as a red flag. The reason being that you need to have at least some very basic knowledge about what level of risk supports the promised level of return. Regardless, if someone makes it out that they have caught on to the next big investment trend ask yourself why they are sharing it with you. If it is that good, surely they would pursue it themselves and not share it with you.

Remember, before you invest your money, dig a bit deeper than the ‘returns’ promised and keep the red flags in mind. You can always report it to the authorities if you feel you are have been, or is being, pressured into investing your money.

The post Are you being scammed? appeared first on PocketWise.

Thankfully, it’s super simple to compare and shop around for the best deals on car insurance. You can literally have your car insurance sorted right from the comfort of your lounge. But, there are 3 things you need to know before you make that decision to buy.

What do you want to get insured?

There are mainly three types of car insurances you can buy. These are Comprehensive, Third party only, Third party and Fire & Theft.

A Third Party Only car insurance has limited benefits. in this instance, only the third parties’ costs to repair damages to their vehicle or property will be covered by your policy.

A Third Party, Fire & Theft policy on the other hand covers all three scenarios. But note that any damage to your own vehicle other than theft and fire are not covered. This means you will foot the bill for fixing damages to your own vehicle or property.

The Comprehensive policy is all encompassing, in that it covers the cost of repair to your own vehicle as well. That is over and above the bill to fix damages to other’s property or vehicle.

How much do you want to insure?

The second item you need to consider when buying car insurance is the maximum amount you want to be able to claim. There are two options. You can either base this on the Market Value of the vehicle or an Agreed Value.

Under the Market Value type policy, an assessment of the value of your car just prior to the incident will be made. You will then be compensated up to that amount. Under the Agree Value type policy, you can agree with the insurance company a pre-determined fixed dollar amount of cover. Should you then make a claim you will be paid that amount.

Remember, the premium you pay on your policy will be determined by the level of claim you are seeking. You will need to decide which of the above is important to your circumstances.

How much “Excess” are you happy to pay?

Most insurance policies come with a term that stipulates an amount called ‘excess’. This is the amount that you would have to pay in case of a claim. This can be anywhere from Nil to thousands. For instance, say the repair costs come to $3000. You have chosen an excess of $250. In this instance, you will pay the first $250 and the insurance company will pay the remaining $2,750.

This is an amount you can negotiate with your insurance company. Obviously, your premium payments will go up as you reduce the ‘excess’ amount, and vice versa.

Now that you have done your homework, it’s time to shop around for the best deals on car insurance. Remember, before you commit to any of the offers, ensure you read the small print!

The post Top 3 things to know before you buy car insurance appeared first on PocketWise.

What set it off?

In early May the Reserve Bank of New Zealand (RBNZ) reduced the headline interest rate (called the overnight cash rate, or OCR) to an historic low of 1.5%. This is the first interest rate cut the central bank has initiated since November 2016.

Consequently banks have slashed their term deposit rates across a swathe of products.

What does this essentially mean for your savings and investments? We will cover off the impact of this event one product at a time.

What is the OCR?

The simplest way to think of the OCR is that it’s the interest rate that banks have to pay to borrow money. When the OCR moves up, the banks pay a higher interest rate. When the OCR moves down they pay a lower interest rate.

Banks may borrow from a number of sources. The OCR is the rate at which they can borrow from other banks.

How term deposits work

When you invest in a term deposit you are essentially putting your money at the bank’s disposal. In return the bank agrees to pay you back a fixed amount, over a certain period of time.

For e.g., consider a 5 year term deposit of 3.5%. The money you invest in that term deposit is at the full disposal for the bank’s use for a period of 5 years. During that time the bank promises to compensate you for the use of that money at a rate of 3.5% p.a.

The bank now has your money at its disposal to deploy on its own terms as explained above. The bank makes a profit if it is able to deploy that money and earn more than the 3.5% it owes you. Banks often penalise you if you withdraw your term deposit prior to that term maturing. Essentially they are charging your for making the money unavailable for the remaining period of the term.

The impact of falling rates

At its peak, the OCR was 8.25%, which was in the 2007/2008 period.

Today the OCR stands at 1.5%. That’s a reduction of 6.75% over a decade. When the rate you can earn on term deposits fall, the income you derive from these type of products get slashed as well.

This can be particularly painful for those with large holdings of term deposits in their portfolio. Typically, retirees would rely on these types of income based products. Relatively, riskier assets like shares are often better suited to grow in value over time, rather than generate income.

A cut of 6.75% over a 5 year term translates to a fall in income earned of $33,750! 10 years ago you could have locked in a term deposit that would have earned you $33,750 more than what you could possibly earn from a similar term deposit product today.

If you rely on your investment portfolio for income, you would be well placed to consider other options in a falling interest rate scenario.

In the meantime, check up on our easy-to-use comparison tool for your best option for term deposits here.

The post Coping with lower term deposit rates appeared first on PocketWise.

Banks have been the ubiquitous provider of various financial services and products for centuries. They continue to be the go-to for most things financial – you need a home loan you go to your bank, you need a credit card you turn to your bank etc.

While technology has enabled a number of non-banks to start providing alternatives, by a significant majority the banks still command a massive user base. But, that doesn’t necessarily mean that this will continue to be the case. There is no debate that typically the banks user base is a very sticky one. Meaning, most of us can’t be bothered moving banks even when we may not be entirely happy with our experience dealing with them. But, given it’s your hard earned money, it may pay to wrestle for it!

Coping with bad behaviour

A recent review of New Zealand banks has highlighted a number of shortcomings within these long established institutions. Many of these issues have a direct impact on how we, as consumers, are served. Fair to say, Kiwis appear not to have been as hard done by as consumers in other countries – at least not at this stage. The sentiment towards banks in the US, UK and Australia for example are sharply far less trusting.

There is no one best solution to tackle the issues raised by the review. One obvious solution may be to regulate the banks more. That is to say, put more rules and constraints around what they are and are not, allowed to do. As obvious as it may sound, the solution could potentially have unintended consequences. Additionally, you and I as individuals may not be able to influence that decision much.

Vote with your dollars

But, you and I can influence behaviour, by refusing to accept bad behaviour. Practically what that would look like is to actively make decisions to shop around for alternatives if we are not treated fairly. Commercial threats such as losing a customer can be more effective in managing bank behaviour than the spectre of regulation (which typically benefit the legal fraternity and raise costs to consumers!).

On the other hand, when you actively decide to switch your bank you will most likely incur nil costs (except in some circumstances). Furthermore, you will likely end up with more cash back in your pocket as you identify deals from other banks when shopping around.

As an example, say you decide to take a $600,000 loan over 30 years. At a 4.5% interest rate you will pay about $495,000 in interest. Should you get an offer for the same loan at 4.2% elsewhere, you would end up paying only $456,000 in interest – that’s nearly $40,000 more in your pocket!

Now imagine you propose to the bank that you are going to take your business elsewhere. That’s a half a million dollar at stake for their business – enough incentive for forcing the best outcomes for yourselves.

We would love to hear what you think of your bank and your experiences with them. Click here to have your say and find out and see what others think.

The post How well do you rate your bank? appeared first on PocketWise.

From 1 April 2019 the KiwiSaver contribution rate you can choose from could be any of 3%, 4%, 6%, 8% or 10% of your salary/wages. Currently you have only three contribution rate options: 3%, 4% and 8%.

When put in percentage terms, an addition of a 6% and a 10% contribution tier does not look dramatic. But, how about if you happen to be one of those sharp savers able to stash away that little bit more for retirement? The impact of raising your contribution rate to one of these new tiers can put hundreds of thousands of additional dollars into your retirement account by the time you hit that age. Here’s how.

Raking in the dollars

Amanda is 28 years old and has been contributing to her KiwiSaver account over the past 5 years. She has saved up about $25,000 in her KiwiSaver account. She has chosen a contribution rate of 4% of her $60,000 salary. Her employer tips in the minimum 3% into her account. With everything else remaining the same Amanda will have $682,000 to enjoy in her retirement years.

With good timing she has just been given a promotion at work with a bump up in her salary which is now $70,000. If she made no changes to her KiwiSaver contribution rate, she will go on to save $755,000 by retirement. This is because her contribution in dollars has gone up. 4% of $70,000 vs. 4% of 60,000.

Instead, Amanda decides to bump up her contribution rate to 6% (one of the new tiers). She figures that it is not as much of a financial strain given her increased salary. At 4% she would contribute $2,800 each year. At the higher 6% contribution rate her annual contribution goes up to $4,200 – well within her salary increase of $10,000 (even after tax). Affordable –  considering she hasn’t dramatically changed her lifestyle and her expenses haven’t gone up much.

At this higher contribtion rate, with all else remaining the same, Amanda will have about $923,000 when she hits retirement age (currently 65). 

Amanda is better off by a massive $168,000 as a result of her decision today to increase her contribution rate!

Where’s the catch?

Yes, agreed you can make a notable difference to your future lifestyle in retirement with small increases in contributions now. But, you have to remember that KiwiSaver in most circumstances, is locked away till you are eligible for retirement. While the rules allow you to access your savings for a first home or at times of financial hardship, these are really rare exceptions.

Any contributions you make over $1,043 a year attracts no additional rebates from the IRD. There aren’t any notable tax benefits from making higher contributions. So, if access to more liquid (or easily accessible) savings is important for you, then choosing a higher contribution rate into KiwiSaver may not be as appealing to you. Check with your financial advisor.

See how your KiwiSaver fund compares with others out there.

The post New savings rules comes with big bucks attached appeared first on PocketWise.

We are at one of those rare times in KiwiSaver’s history that members will be facing losses, much of it related to issues in investment markets as 2018 wound down. 

KiwiSaver funds are investment products which pool together the contribution amounts from individual members, employers and the Government and uses that money to collectively buy investment assets. Assets such as shares are owned for their potential to grow in value over longer periods of time (accepting the short term fluctuations in their value) while assets such as bonds are owned for its ability to generate a regular and stable income (at the cost of perhaps lower returns than shares over longer periods of time). Over time, fund managers trade in these assets making buying and selling decisions, hoping to make a profit.

A majority of KiwiSaver funds are diversified, meaning invested in a mix of stable income generating assets and relatively riskier assets like shares.

Investment market wobbles

2018 was marked, especially in its final months, by wild swings in investment markets leading to sharemarkets around the globe giving up significant gains after many years of growth. As a result, about 80% of all diversified KiwiSaver funds lost value in the process, over 2018. But your fate would have depended on which category of funds you are invested in, or the mix of assets your fund invested in.

At the worst end, funds lost about 7% value in 2018. On a savings pot with $20,000 that translates to a loss of about $1,400.  It should be noted though that it pays to be astute not only about which category of funds you are invested in, but also which particular fund within a category.

For example, if you consider the Balanced fund category the best performing fund actually gained about 1% while the worst performing fund saw a loss of about 4.3% in 2018 – a substantial difference of 5.3% between two similar category funds. That translates to $5.30 for every $100 you have in KiwiSaver. On a $50,000 balance that’s a $2,650 difference.

But, the actual difference will be much more, considering your balance doesn’t stay constant through the year as regular contributions from you, your employer and the Government are being added on to the fund. So your gains and losses will be amplified to that degree.

Your decision makes all the difference

It’s not right to say this is the first time investment losses have been seen before in the short history of KiwiSaver. In fact, it was not long after KiwiSaver was set up in 2007 that the global financial crisis came along. But the difference between the impact of recent volatile markets and the impact of the global financial crisis is that back then savings balances in most KiwiSaver accounts were minimal, meaning the effect of a loss would not have been as obvious or dramatic as now.

So how safe is your money in your KiwiSaver account, and should you be worried about recent gyrations? For as long as you are invested, take it that you will see some degree of swings between gains and losses. By how much, will depend on what your fund is invested in. As long as you don’t need to withdraw your savings immediately, these losses are only on paper. Over longer periods of time there is a greater likelihood that these funds will recover their losses.

Much of your future prospects will rely on the choice of category you make. It will also be determined by how good your fund’s manager makes decisions around buying and selling of assets in the fund. 

Choose wisely! You can choose appropriate KiwiSaver funds by simply responding to a few questions here which should act as a handy guide for you.

The post How safe is your money in KiwiSaver? appeared first on PocketWise.

Should you exchange your New Zealand dollars right away or should you wait until it’s closer to your travel? As much as this can be a tricky one to decide, it always helps to understand what some of the usual reasons are for foreign currencies to change in value against your local dollar.

If you had NZ$1,000 on you back in August last year and changed it to US dollars you would have had about US$750 to spend when overseas. Today, that same NZ$1,000 will buy you only US$660 to spend overseas. A 12% loss on your spending capacity. You could wait another month but then you may get even less. Although, there is always the probability that you could buy more in a month’s time. What follows is a simplistic view on how everything hangs together.

When exchanging one currency to another, the value of the foreign currency relative to your local currency changes largely based on demand and supply conditions. When there is more demand for the foreign currency, the price of that goes up relative to the NZ dollar.

So, for instance, when interest rates go up in the US, the demand for assets such as deposits in US banks go up (because you can earn more from them now) – meaning more foreign investors will want to invest in those type of assets. When more investors enter that market the demand for the US dollar goes up as those investors are selling their local currency and buying US dollars to spend on buying those assets. This means the US dollar grows stronger against each of those foreign currencies.

Since August last year interest rates in the US have been raised 4 times, from 1.25% to 2.25% today – the last raise was as recent as this month, when they were put up by 0.25%.

Over that same period, interest rates in New Zealand have held steady at 1.75%. This means that within just the past 12 months the US has, relative to New Zealand, gone from a lower interest earning economy to a higher interest earning economy. This aligns with the change in value of the US dollar versus the NZ dollar over the same time.

That’s the theory! You still need to decide whether you should change your New Zealand dollar today or wait. Most indicators are that the New Zealand dollar is on a downward trend against the US dollar. Why? There is speculation that we may have to cut our interest rates, whereas in all likelihood the US may actually put up interest rates again. This means the relative strength of the US dollar is going to go up even further against the NZ dollar – that means even fewer US dollars for you to spend!

Of course, you are not guaranteed of the above. A half-way measure may be to change some of your NZ dollars now and change the rest closer to your travel.

Find out how many US dollars you can buy today.

The post The Best Time To Buy Your Travel Money appeared first on PocketWise.

Your personal financial journey is a long one. Pretty much starting from when you start earning/receiving your first dollars (whenever and however that is!), or when you accept a loan from someone.

It then continues on till you kick your bucket at some stage. Even in death, if you didn’t sort out your estate before you passed on, then financial issues will still raise its head – but on the bright side, you won’t be around to face them! Putting those morbid thoughts aside, have you ever wondered how you are going to fund your entire financial journey?

You are likely going to spend about 40-45 years of your life working. That is also the time you have the best chance of earning an income from salary or wages. The period from when you are 20 to about 65 are also the years you are most likely to be building up your assets (for example buying a house or investing in shares etc.). But, given all the advances in the field of medicine and a better of quality of life, it is likely that you may live up to be 95 or 100. Meaning, you have a period of 30 years after you retire when you are also highly likely not to earn an income from a salary or wage.

This stage in life is the ‘drawdown’ stage – literally meaning you are drawing down the wealth you have created prior to retiring.  So the question for you is whether you are on track to build up enough wealth to be drawn down for the rest of your life. Clearly, part of the challenge is you don’t know how long you are going to live.

Being financially resilient is to have a plan or a strategy to give you financial independence throughout your life – being able to spend on the things you would like to continue enjoy doing in life.

While New Zealand has a national retirement scheme (NZ Super), individual entitlements from this Govt. initiative are highly unlikely to be sufficient to maintain the lifestyle you want to in your retirement years. The KiwiSaver initiative was introduced 11 years ago to provide a supplementary savings pot for yourself, over and above your NZ Super entitlement.

To put some context to what it could mean in real dollar terms. Take the case of a 30 year old who is contributing to KiwiSaver at the 3% rate and assume they are on an annual salary of $60,000, and invested in a fund earning an average 6% p.a. This individual will have close to half a million dollars in their KiwiSaver account by the time they hit retirement age – that’s a serious pot of money!

So then the question arises – are you sure you are in the right KiwiSaver fund that is going to maximise your retirement balance? That needs homework on your part.

A big part of being financially resilient is being smart about how you mange your money. Do you know if you are invested in the most suitable KiwiSaver fund? There are about 245 different funds you can choose from and they all come in different shapes and sizes – different fees and costs and different risks and vastly varying performances.  Choose carefully!

Compare KiwiSaver funds here.

The PocketWise Team

The post Money Week – Your personal financial journey appeared first on PocketWise.