24 May 2016
Don't put your money in the bank - savers have options
Savers have options if they want a better return than banks can give them.
Former Auckland resident Kimberly Juergens is working overseas, saving money for her next move.
But deciding where to put it has been tricky. Ten years ago she might have been able to get into an investment property with a small deposit. Now, she is looking at shares and term deposits to try to increase the amount of interest she can earn.
As many people in her situation have discovered, it is not a great time to be a saver with money in the bank.
Interest rates are at record lows and some savings accounts are paying as little as 0.25 per cent. But what else can you do with your cash?
You will get a little bit more of a return if you put your money in a term deposit, but not a lot. Term deposits currently pay up to 3.8 per cent per year if you are willing to lock the money up for five years.
The benefit of a term deposit is that it is low-risk and while the returns are low, they still beat the current rate of inflation.
David Boyle, group manager of education at the Commission for Financial Capability, said: "Although rates are at all-time lows, inflation is low, too, so the real rate of return is low but maybe not worse than it has been in the past."
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Bonds are another low-risk option if you are looking for somewhere to put your money. Corporate bonds usually offer a better return than Government bonds. Wellington Airport recently offered $75 million in bonds with an interest rate of 4.2 per cent per year. Bondholders get their money back in 2023.
The key is getting access to them – a lot of recent bond issues have been snapped up even before they hit the market.
Adviser Liz Koh said bonds should be approached with caution. "I wouldn't want to go into long-term bonds at the bottom of an interest-rate cycle."
To see what your income would be, try the Lifetime Income Calculator.
Anyone with more than a couple of hundred dollars to spend can buy a handful of shares. Over recent years, this has been a good strategy as the stock market has gone from strength to strength. A Fisher and Paykel healthcare share bought for $4.17 in May 2014 is worth $9.60 now.
New Zealand's share market offers quite high dividend yields – regular payments made from a company to shareholders in proportion ot their shareholding – compared to some. This helps if it is important for you to have an income stream from your money. But remember that share prices can drop.
You can get more diversification in a managed investment fund.
Koh recommends a balanced fund for people who will need their money in a few years' time. "You can leave it sitting there and it will go up and down. If you are saving to buy a house you don't necessarily want to leave it in the bank. If you are saving a deposit it might take five years or so, a balanced fund will give an extra return over that time."
Many managed funds allow investors to start with an upfront lump sum of $1000 and regular monthly contributions.
If you are thinking about your retirement, a variable annuity could be an option. The Lifetime Income Fund was recently launched, which gives savers a guaranteed regular income for as long as they live. The minimum investment is $100,000.
Those who start withdrawals from the fund aged 65 to 69 can expect to receive 5 per cent, after tax, of that initial investment back into their bank accounts for the rest of their lives. That equates to about $192 a fortnight on $100,000 invested.
For those aged 70 to 74, the return is 5.5 per cent, for those 75 to 79 it is 6 per cent and between 80 and 85, it is 6.5 per cent.
The payments are drawn from the investor's capital each year. But if that account runs out while the investor is still alive, payments continue.
New Zealand is starting to come round to the idea of exchange-traded funds, which are popular internationally. NZX now offers a range, including the NZ Top 10 Fund, which tracks the S&P/NZX10 index and is made up of the 10 largest listed companies on the NZX. This fund returned 4.51 per cent over the past year.
They operate on a similar basis to a managed fund in that you can start saving with a small upfront amount and make monthly contributions from then on.
Unlike a managed fund, ETFs just track an index – managers will not try to pick the best stocks to be in. They are usually a bit cheaper than a managed fund because of this.
Adviser Brent Sheather said it was a good option for diversification. "Because the assets are listed on the NZX it is likely they will be fairly priced – not too high and not too low. This is very important because if you are not an expert knowing that something is fairly valued is worth paying for."
If you have enough money saved for a deposit, you could buy an investment property.
Koh said she was seeing more people getting into investment property, taking advantage of the fact that borrowing rates were low. "But you have to know what you are doing," she said. "It's not necessarily a good thing to do in your retirement because you can't access the capital and you get big bills every now and then for maintenance. But if you've got 10 years before you need it, that's another option that people seem to be choosing."
You could make money by lending it to someone else. Peer-to-peer platforms allow borrowers to get loans directly from people who have the money to invest. You need $500 to start with Harmoney, Squirrel Money and Lending Crowd. Lendme requires a minimum $1000.
The risk of peer-to-peer lending depends entirely on the borrowers – you rely on the platforms' systems judging their ability to repay.
Koh said she had concerns about how some of the platforms did their credit ratings and was worried about the lack of diversification that investors would get if they put a large proportion of their money into peer-to-peer lending. 'If you put your money in the bank the bank is lending that as well but it's being spread across a much bigger range of different loans. It's okay for some people but I would certainly not put a large percentage of my savings into something like that."
If you are nearing 65 or are saving solely for a first home, you could put your money into KiwiSaver.
The schemes have relatively low management fees and, if you weren't already contributing enough to get the full member tax credit from the Government, adding more to your savings will give you 50c back on every dollar up to $1042.
Sheather said KiwiSaver had three problems: "You can't get the money out until you are 65 unless you are buying a house, and even then the rules could change and you might only be allowed to withdraw your savings via an annuity. The other problem is that with most KiwiSaver schemes you have all your money with one manager who might turn out to be a dud. Most institutions diversify by fund manager."