When we choose a KiwiSaver or other investment fund, the only thing that really matters, of course, is performance – the dollars in your account. So why worry about fees?
If we buy a car, a coat or a catamaran, the more we pay, the higher the quality. But this is not true in KiwiSaver and other funds. I’ve been watching fund performance for decades, and there seems to be no correlation between what you pay and what you get. So you might as well pay less.
I just checked the Smart Investor tool on sorted.org.nz, comparing the average five-year returns of the three lowest-fee funds and the three highest-fee funds in each risk category.
The lowest-fee funds did better in the defensive, growth and aggressive categories, while the highest-fee ones did better in the conservative and balanced categories. In a different period, it could well be the other way round.
Why don’t we get more when we pay more? Higher fees are charged by “active” fund managers who employ highly paid people to pick their investments. Lower fees are charged by “passive” or “index fund” managers, who simply invest in all the shares or bonds in a market index, such as the NZX50 or America’s S&P500. This is much cheaper, and passive funds also trade much less often, saving on trading costs.
Active managers put in more work. The trouble is, it’s really hard to pick which investments are going to perform well. If a company is thriving, its share price will already have risen, so it’s not necessarily a good investment.
It turns out that while active managers sometimes make good choices, just as often they make poor choices. Meanwhile, index funds chug along, performing as well as the market that their index covers. Over the years, they do as well as the active funds, with lower fees.
In recent decades, passive fund management has really caught on overseas, and increasingly in New Zealand. There is now a wide range of passive funds to choose from in KiwiSaver.
Providers that offer all-passive or mainly passive funds are Kernel, Koura and SuperLife. Also, AMP, InvestNow, NZ Funds and Sharesies have some passive funds, and Simplicity’s funds are largely passive, according to Retirement Commission surveys.
For more info about passive funds, sort by lowest fees in the Smart Investor tool on sorted.org.nz. It’s easy to move funds. Just ask the provider you want to switch to.
On your question about moving at your age, lower fees will make quite a difference, even if you spend all your KiwiSaver money at 65.
Let’s say your fund earns 6% a year before fees, and deposits to your account total $500 a month, rising by 2% each year. Your balance now is $30,000. After 12 years, at the highest aggressive fund fee of 2.01%, your total would be $150,000. With the lowest aggressive-fund fee of 0.03%, it would be $177,000.
What’s more, many people leave their money in KiwiSaver throughout retirement – which could be for 30 years or more. The difference over 40 years or so would be huge.
By the way, if your husband’s fund performance lately has been disappointing, that’s a worry. The latest Morningstar KiwiSaver report, for periods ending September 30, shows all but four tiny new funds reported positive annual returns in the last year, with the vast majority of returns more than 10%.
Average after-fee returns in defensive funds were an astonishing 11.6%. Then it ranges up to 21.6% for aggressive funds. These are way higher than the 4.3% to 9.1% range over 10 years.
It’s funny how we hear lots of complaints when KiwiSaver fund balances fall, but largely silence when they zoom upwards!
A teacher comments …
Q: Regarding last week’s correspondent desperate for farmers, who gain a massive asset over their working life, not to have to pay CGT on it and using teachers as the example of people who don’t work hard, as a teacher for 20 years I have thoughts!
The lazy trope of teachers only working 8-3 and having long holidays and teacher-only days, presumably to lie around at home all day laughing at the suckers who “work for a living”, needs to be put to rest.
It wasn’t until I left teaching that I realised how hard I had worked. Long days at school and then many hours working at home each night and weekends. Similar to a farmer, I would imagine, you never stop thinking about work. Teachers constantly think about their students and how they can help them.
A: I’m sure that’s true, from talking to teachers I know.
And another …
Q: In response to the person who wrote that a teacher’s job (8-3 hours, months of holidays, teacher-only days yada yada) is not equivalent to a dairy farmer’s, I would say: “If you can’t beat ‘em, join ‘em!” If people think being a teacher is so easy, why aren’t they flocking to the job? I think our desperate teacher shortage speaks for itself …
A: Good question.
And another …
Q: Oh how I laughed, Mary, at the wonderful misconception of the 9 to 3 teaching job! After nearly 20 years in the game, my usual challenge to that is, “Yep, it’s wonderful. And of course, such a low-risk job in today’s society!”
I don’t even care to challenge these things anymore. I say, “Come and try my cushy job, you’ll love it.” My motto: laugh it off teachers, you know how darn hard you work!
A: Well put.
Would CGT hit KiwiSaver?
Q: I am glad that capital gains tax (CGT) is being discussed. I do hope that if introduced it could be a way to reduce income tax.
Most of the debate seems to be around property, but its introduction could have a big effect on how people think about investing, particularly with KiwiSaver. People invest in shares to save for retirement through buying shares, or managed funds and KiwiSaver during their working life.
Once CGT is applied to share investments over the long term they are not quite as attractive, particularly the effect on compound growth. I hope the reduction in income tax is enough to offset the loss of retirement savings.
Mary, do you know if any studies have been done on how the introduction of CGT might affect retirement investments?
A: I doubt if there will be research until a Government has proposed a CGT and is considering whether to apply it to KiwiSaver and other savings.
How are these savings currently taxed? Almost all KiwiSaver and other funds are portfolio investment entities, or PIES. You tell the provider your PIE tax rate, called your PIR. The provider then pays your tax for you. But it’s still interesting to know how different assets are taxed:
- New Zealand and Australian shares: You are taxed only on dividends – not on any capital gains or losses when the market rises or falls. Also, NZ shares benefit from dividend imputation. To the extent the dividends come out of profits taxed at the company level – and most dividends do – the dividends are not taxed again.
What’s more, if your PIR is less than the top 28%, (other rates are 10.5% and 17.5%) you can use excess imputation credits against other taxable income in your KiwiSaver account. Your provider will take care of that.
- Other overseas shares: These are taxed under the FDR (fair dividend rate) regime. No matter what the return is, your PIE income will be 5% of the value of the shares. It’s a sort of proxy for dividends.
- NZ and overseas bonds: These are taxed on interest received and also gains and losses. Bonds gain value when interest rates fall, because the bonds in the fund were issued at what have become older, higher rates. On the other hand, when interest rates rise, bond values fall.
- Cash. Tax is paid on interest earned.
By the way, employer contributions are also taxed, which is why your 3% contribution is larger than your employer’s 3% contribution.
What might happen under a CGT? I wouldn’t be surprised to see PIEs continue. After all, the Government introduced KiwiSaver to encourage retirement saving. It’s hard to see it reversing that.
‘Don’t steal my savings’
Q: As a waged worker now approaching retirement and fortunate(!) to have paid the highest rates of income tax, I am troubled by your crusade for capital gains tax. CGT will see my accrued savings stolen in retirement and squandered by another government that enjoys splashing taxpayers’ cash at money printing and an expanding bureaucracy.
You were honest enough to suggest recently that income tax “could rise less” with a CGT – better than the politicians who imply income tax might be reduced. If CGT was phased in over 20 years a fair accommodation might result, but I doubt those who would relish driving the comfortably-off overseas would care. Phasing is just wishful thinking. Useless and bone-headed government spending is the real problem for NZ, not lack of taxation.
A: Nobody is talking about stealing your savings! A new tax might reduce the returns you earn. But it might not even do that, as I say above. Let’s look at your other points:
- Government spending. I bet there’s heaps that you benefit from, such as roads, police, healthcare and so on. Even if you don’t use much healthcare spending, would you really like to see other New Zealanders sick and dying because they don’t get the care they need?
- Perhaps you dislike regulation, but often it actually does a lot of good, keeping many people, businesses and institutions honest. No one ever likes every type of government expenditure. And there’s always room for improvements. But still, we all like the “system” to keep rolling along.
- Driving the wealthy overseas. Where would they go? Pretty much every country we compare ourselves with taxes capital gains.
- How CGT might affect income tax rates. I think you’re referring to a comment I made about inflation and tax. That’s a different issue. If the Government receives new revenue from a tax on gains, clearly it could reduce the tax on income. And it probably would, to help people accept the new tax.
One last point: you acknowledge you’ve been lucky to be paying the highest tax, because it means you’ve earned plenty. It reminds me of something a businessman friend used to say: “The only thing worse than paying tax is not paying tax – because you’ve made no profit!”
Would it really be so bad if a portion of the future growth in your wealth want towards helping others less fortunate?
Keep your home
Q: To the solo parent in last week’s column who is considering selling her two-bedroom townhouse and renting, I was a single parent to two children and bought a two-bedroom townhouse that was a bit small for our needs, but I brought my children up in it.
It was the best financial decision I ever made. The stability and safety of owning my own place during those years meant everything to me. Now my children have left home I have moved to a new house which I love, and am so relieved as I head towards retirement that I own my home, which will give me choices as I get older.
A: I’m sure most people would agree with you.
Tenants’ rights
Q: A reader was asking you about the pros and cons of renting versus buying a home, and you mentioned that in Europe many people rent their whole lives.
I think it would be important to add that in, for example, Germany, there are strong protections for tenants. Signing a lease can be almost as binding as purchasing the home/apartment, and it is very difficult for a landlord to end a tenancy, hence the lifelong renters.
A: That’s a really good point. And it could be one aspect of current and future governments’ responses to the growing inability of people to afford to buy homes. That trend would be more acceptable if long-term leases became more common, and tenants had more rights.
* Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.
