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.

The ACCC report found that individual consumers sending US dollars and British pounds in 2017 and 2018 could have collectively saved around $150 million. All they had to do was use the lowest-priced alternative suppliers instead of the big four banks.

This is a timely reminder for Kiwis serviced by the same four banks in New Zealand. It is really important to compare a number of factors when using international money transfer services. The three main criteria to keep in mind are the transaction fees, the currency exchange rate and the time it takes to transfer your funds.

What to look out for: Transaction fees

If you compare the best deals on international money transfer services here, you will see that transaction fees can vary widely. Using a default amount of $1,000 NZD to send to AUD, the fees you pay will range from ‘nil’ to as high as over $10. Similar fees can be as high as $40 when using banks, depending on which bank you use.

This difference will vary depending on which currency combination you use, but clearly the range can be wide. Remember, the larger the amount you transfer the wider will be the range of transaction fees between providers. Typically, the fees you pay to an online provider will be cheaper than the one you pay at the bank.

What to look out for: Currency exchange rates

Exchange rates have a significant impact on the final amount you receive in the foreign currency. At any point in time there is a range of currency exchange rates between NZD and other currencies. There is also a difference in rates between what individual consumers receive and what institutions receive. Invariably, the rates are less favourable for individual consumers. Banks typically charge rates closer to the higher end of the range. Online alternatives charge the middle of the range rates. This makes the online alternatives immediately more appealing.

For instance, as of 11 am on 3 Sep 2019 you could spend NZ$101 to buy AU$100 via an online services. At the same time, banks on average where charging an average of NZD106. That’s $5 on every AU$100 you exchange.

From the above two points it’s obvious that there is a combination of factors you need to be aware of before making a decision on which international money transfer service provider to use.

Shop around for the best deals

An additional challenge is highlighted in the ACCC report. There is a lack of transparency when it comes to how banks charge consumers for the service. The report went to the length of stating how often bank’s claims around ‘no fees’ are misleading consumers. The ‘no fees’ carrot being dangled to attract consumers is largely negated by high exchange rates that are applied. This is often done without the knowledge of the consumer. In their own words “……give the illusion that the price is lower than it really is..”. As the ACCC reports, the big four were “consistently more expensive than many other suppliers” for international money transfers.

Pocketwise has made similar observations here in New Zealand. Online options consistently offer better deals than mainstream banks. Before you do your next transfer, make sure you shop for the best deals on international money transfer services.

As comforting as it may be to use a familiar bank for international money transfers, remember loyalty comes at a price.

The post Loyalty comes at a price – avoid international money transfer rip-offs 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.

As opposed to that, mortgage rates that loosely follow the headline rate, have been very attractive. You can now lock in your home loan repayment for the next one year at just 3.79%. If you wish you can even lock in your repayments over the next 5 years at just 4.39% per annum.  

So, should you be fixing these rates considering they are so low, or should you not? The case for not locking in now is that the headline rates may go down even further. On the back of that, it’s possible mortgage rates could fall further. But is that certain?

There are a number of factors you should consider before you make a decision to fix, or otherwise.

Managing cashflows

Perhaps first and foremost relates to how much certainty you wish to have in terms of your cashflow to meet your regular loan repayment obligations. For some, being able to lock in a rate now means that there is certainty of cash outflow into the future.

The benefit is that it helps you better budget your income and expenditure around that amount. Depending on how much you value ‘certainty’ you can choose a timeframe that your are comfortable with. This could be over 6 months, 1 year, 2 years etc.

Instead, if the certainty of cash outflow is not of great concern to you, it is better to make a considered choice between fixing your mortgage rates versus otherwise.

Given floating mortgage rates offered by most banks are over 5.5%, there is still a sizeable margin over any of the fixed mortgage rate terms. For instance, on a loan amount of $500,000 someone on a floating rate of 5.65% would pay $28,250 in interest in the next one year. On the other hand, someone else on a fixed rate over the same time would be paying about $19,250 – a substantial difference of $9,000 in just a year. 

On the above basis, if you do decide to go for a fixed rate option, the next question is pretty obvious. How long should you fix it for? 

Spreading the bet

Recent indications, and the market commentary, indicates an emerging slowdown in the economy. Should that happen there is a potential that banks would follow suit in reducing mortgage rates. (There is always a ‘should’ with these types of forecasts).

On the other hand, proposed rule changes for banks may mean that they face higher costs for running their business. Should that get passed on to consumers that could mean that mortgage interest rates could rise. Under such heightened levels of uncertainty one option to consider is staggering the fixed rate periods.

Practically, this would mean that you split the loan outstanding into smaller portions. Then, fix each portion over different timeframes. For instance, you could lock in the 1, 2, 3 and 4 year loan rates by putting a $125,000 into each of the fixed terms. You still run the risk that in two years time the rates move lower. But, by then you would have at least some of your outstanding loan ready to be rolled over. At which stage you can benefit from the lower rates then.

You can apply this thinking in any number of ways. It is not necessary to have equal amounts in each timeframe. You could front load a majority of the loan amount to the short term. Or you could have only a smaller amount locked into a near term rate with the bulk of it locked in over a longer term.

Shop around for the best home loan mortgage rates here.

The post To fix your mortgage rate, or not, that’s the question appeared first on PocketWise.

It goes without saying that there is no crystal ball to look into the future. So, it’s impossible to forsee how foreign exchange rates may change over short periods of time. Buying foreign currencies by trying to predict what the future might hold is fraught with danger.

Events such as a change in headline interest rates either locally or in the foreign country can have immediate impact on exchange rates. But it is close to speculation when determining how long those trends would continue and when to time your purchase. Exchange rates are influenced by a myriad of reasons and as such are hard to pin down over the short term.

The impact of interest rate cuts

Almost a month ago, the Reserve Bank of New Zealand (RBNZ) cut headline interest rates to an historical low of 1.5%. Over the following few weeks, the exchange rate between NZ dollars and US dollars fell from about 0.6598 to 0.6484. This meant that you had to pay more NZ dollars to buy the same US dollars.

To illustrate this, suppose you need US$5,000 of spending money. Before the rate cut announcement, you would have spent NZ$7,578 to buy the US$5,000. But, if you waited for a few weeks you would have ended up paying NZ$7,711 for the US$5,000. You would have been worse off by NZ$133.

Ironically, if you waited for another week or two more you could have bought cheaper again as rates moved back up. Find out here who’s got the best exchange rates now.

You get more bang for your local buck when you are able to buy more of the foreign currency for the same amount of home currency. The obvious question then is to figure out when is it best to buy the foreign currency.

In the face of such uncertainty, a pre-paid travel money card could be handy. Especially if you are worried about the exchange rate going against you.

How does a travel money card work?

It’s pretty straightforward. You exchange your home currency for the foreign currency and load up your travel card with that amount. You then simply use the card when you are overseas to make payments in the foreign currency. Today’s exchange rate will determine the rate at which you will be able to buy the foreign currency. By doing so, you are effectively locking in today’s rate for the future use of your money.

As an example, say you are travelling to the US in a month’s time. Suppose the exchange rate today is 0.65. If you want to have US$1,000 of spending money you can pay NZ$1,583.46 today and load up the US dollars on your travel card. While you are in the US you can then use the card for all your payments, with no regard to whatever the exchange rate might be in a month’s time.

It makes imminent sense to shop around for the best foreign currency rates on offer. Click here for all your money transfer needs.

The post Falling interest rates impacting on your travel money? appeared first on PocketWise.

Over half of those funds are yet to recover their losses fully by end of March this year. This is despite a very strong recovery in markets in the first three months of this year. Are you confident enough that you are in the KiwiSaver fund best suited for you?

Turn in sentiment for global markets

Funds invested in higher risk assets, such as shares, suffered most of the losses in the previous period. This included both diversified funds (which invest your money across different types of asset classes), as well as those funds that invested in just one type of asset (for e.g., in shares of global companies).

That follows on from almost a decade of steady positive growth. Geo-political uncertainties including trade wars have blunted market sentiment globally. Based on what’s unfolding, it doesn’t appear as if there will be any let up in this nervousness looking ahead. In that context, the “type” of KiwiSaver fund you choose to contribute to can have a huge impact on your retirement savings. By hundreds of thousands of dollars.

What are your options?

You should be aware that there are about 230 different KiwiSaver funds to choose from. Each fund comes with its own flavor, based on what types of assets it invests in. How and what a fund invests in is determined by the objective the fund is trying to achieve.

On that basis, it should be expected that some funds see much higher levels of ups and downs relative to others. On the other hand, these funds have the potential to provide higher returns over longer periods.

You should expect ups and downs in returns when invested in financial markets. But, you are perhaps not putting your money to the best use if you are not in the right category of funds. The question is are you taking enough risk to achieve your longer term goal, or not?

Finding the right fit

For a lot of people it may be very appropriate to be in a higher risk fund. The worst you could do is to make a decision to switch KiwiSaver funds simply because of short-term losses. That simply locks in losses, without the opportunity to recover those losses over time.

Typically, the longer you are able to remain invested in markets the better your chances of recovering any losses. Your investment time-frame should provide you a good yardstick as to which type of fund to choose. You should then take into consideration the fees charged by a fund. You could also factor in the fund’s social consciousness into your decision making.

Whenever you are ready to review your KiwiSaver fund, use this very simple tool to help you with your decision. The tool features all KiwiSaver funds available for you to contribute to.

The post KiwiSaver funds still licking their wounds 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.