What happened in 2007 and what to expect in 2008
Come New Year’s Day, millions of people up and down the country will be pondering their resolutions for the year.
Some will be wondering if they should open a KiwiSaver account and start saving for their retirement. Other financial goals may include buying an investment property or putting money into PIE-style (Portfolio Investment Entity) managed fund.
When it comes to KiwiSaver, it is often said that joining is a "no brainer" thanks to the injection of government subsidy everyone's account receives. If you put the minimum of $20 a week in, the government matches it. That's an instant 100% return on your money and there aren't many investments that offer that.
There's also the fact that for now the government offers a $1,000 kick start and also subsidises the fees, meaning your pot of money will grow faster.
Even those opposed to the government subsidising private superannuation savings such as Michael Littlewood, director of the University of Auckland business school's Retirement Policy and Research Centre, say that you may as well take advantage of the subsidies, because you'll be paying for them through your taxes.
Plenty of ordinary people still haven't even the vaguest clue about the scheme. Some, says Littlewood think it's run by Kiwibank.
A reader, let's call her Anita, wrote to me following an earlier issue of ActiveMoney and pointed out that many investors either don't know or ignore - that KiwiSaver deposits aren't government guaranteed.
She said: "Do you think it might be a good idea to have some open discussion around the security of your KiwiSaver funds and the uncertainty of some of the expected detail in the current offering?"
"Given the number of finance companies going belly-up, why is it that no mention has been made loudly that your hard-earned KiwiSaver funds are actually not government backed? Most of the talk in the market seems to focus on 'getting free money from the government'."
I put Anita's argument to Roger Perry AMP Financial Services' General Manager of Savings and Investments, who points out that although investors' KiwiSaver pots aren't government guaranteed, the six default providers are subject to quite stringent regulations including the requirement to have an external trustee as well as regular reporting to the government Actuary and the Ministry of Economic Development (MED).
"The regulations for the non-default providers are not as stringent. They can have their own trustee, provided there is an external trustee on the board and they don't have to report to the MED."
Anita went on to say: "Also, with elections looming close, no speculation has been made around the government contributions... something that is only as sure as the government in at the time."
It's a good question. Governments can and do change retirement schemes, or even scrap them as National Prime Minister Robert Muldoon did in the 1970s. I do wonder how long the $1,000 kick start will be available and signed my children up on day one.
Perry points out that his company has made a very large investment into the KiwiSaver concept and is becoming a default provider. Even if there is a change of government he is confident that the company's investment will be safe. In other words, he expects KiwiSaver to continue.
The final word on this goes to Anita because every investor should weigh up the pros and cons before making a decision: "I'm not trying to be an opponent of the scheme, I just think there's a surplus of pro material out there to lure people into joining and not enough real-life pros and cons to really give people a chance to make a well-informed decision.
"Imagine an existing employee opting in now on the strength of all this glowing information, the government changes at the next election along with the scheme and you're stuck in this thing until age 65? It's really only that government contribution that really makes the scheme look pretty and only at the 4% level."
2008 – the year of...
In 2007, the residential property market has continued to grow at a frenetic pace - much to the surprise of even many economists and other pundits.
Financial markets always overshoot at both ends and sooner or later the property market will at best have to level out to let other fundamentals such as wages and rents catch up. We're not living in a new paradigm.
There will still be plenty of individuals looking to get into the investment property market this year and it may well work for them. With a long enough time horizon, say 10 years or more, that won't matter.
It's never a good idea to try and second-guess the property market. Not even the experts can always do that. Given the fact, however, that it's virtually impossible to buy a cash-flow positive property and you'll almost certainly be topping up the mortgage to the tune of $100 or more a week, any such investment should be considered carefully first.
When it comes to share market-based investments, the managed funds industry is hoping that PIE's (Portfolio Investment Entities) grab Kiwis' attention this year.
That's thanks to new tax treatment. From April 2008, earnings from PIE's will be taxed at either 19.5% or 30% depending on the individual's marginal tax rate. If you're a higher rate tax-payer at 39%, PIE's provide a great tax break - ensuring that more money is left in your investment and it grows at a faster rate.
Diana Clement