Agony Aunt: Investing an inheritance

Dear Janine

My wife and I have just inherited some money. We are in our early 50s and we want to make sure we don't spend it. Should we put it in our KiwiSaver accounts with our bank? We have $100,000 and that's quite a lot of money to us. It is likely we will get another larger amount within a couple of years. KiwiSaver seems to be the place to invest and the returns have been a little bit better than term deposits in the account we are in. What do you think?

ANSWER:

The dangers of KiwiSaver

Simple answer; you'd have to drag me kicking and screaming to put that much money in my KiwiSaver. 

Of course I adore these savings plans. Everyone should start their journey with KiwiSaver, but they are merely a component of retirement planning, not a silver bullet. These schemes have some major faults – mainly for the wealthy and the well paid.

To be honest, we all try to avoid criticising KiwiSaver. God forbid if some hapless reader of a newspaper suddenly stopped their monthly contributions or didn't sign up. So it's not entirely surprising to hear the suggestion of investing an inheritance in this way. I blame people like myself for you coming to this conclusion.

It has been an uphill slog to get the New Zealand public to save for their retirement. Now we are away and racing, the financial industry just keeps whistling it's happy-tune and avoids front footing drawbacks.  

KiwiSaver padlocks

The number one issue is liquidity. You can't get your money until you are 65 years old. Of course the system has to work like this, so it's not a criticism. It's a retirement plan and many people don't have the discipline to keep their mitts off it. But for those paid large bonuses, receiving inheritances, selling businesses and winning lotto, it's not usually the right thing to do. KiwiSaver investments are like any other managed fund. They are actually highly liquid. It's only a government rule that you can't touch it until you are 65. It's fake illiquidity designed to save us from ourselves. 

If a KiwiSaver fund grows spectacularly, you can't scoop some off for a family holiday. If you want to start a business, give children a house deposit, retire early or buy a holiday home, forget it. KiwiSaver comes covered in padlocks. Besides access for first home purchases, you need to be dead, disabled, destitute or departing the country. In short; 'D' for difficult. 

People with wealth are happy to make small contributions from their income, collect the tax credits and maximise their employer's donation, but they keep the bulk of their money liquid and more diversified.

I realise you want to prevent yourself from spending this inheritance, but think carefully before putting unnecessary barriers in place. A financial adviser is quite capable of acting as your guard dog. I'd rather deal with a nippy little Terrier than the Pit-bull of government policy. 

Diversification of managers

Another very real problem with KiwiSaver is the structure. The government set up a framework where you can only pick one manager. 

Most retail investors (that's you, me and our nana's) are not aware that KiwiSaver is mighty odd by international standards. In other countries an umbrella structure allows savers to invest with many different managers and pick their specialties. It's known as 'open architecture'. When I first saw the set-up of the New Zealand system I nearly choked. It was a huge coup for managers. Yes, you can switch, but you can't split your money between them. Yes, some run a limited multi-manager scheme, but I'm clutching at straws if I try to pretend those are adequate. 

With small amounts, the diversification one manager can provide is perfectly ok.  Once the bigger balances appear, that concentration is a very real problem, especially for active managers ('stock pickers' rather than the 'index followers'). Their belief system can infiltrate a whole fund range and expose investors when markets move against that philosophy. A single manager in New Zealand rarely has the skills to specialise in international equities or bond funds. We become exposed to their lack of 'breadth'. Many are forced to outsource and own-brand some else's funds. 

KiwiSaver balances will grow to several hundred thousand dollars for many New Zealanders. Is it sensible to have it all with one manager?  No it's not. It's just better than doing nothing. The legislation has us caught between a rock and a hard place. You'd be mad not to keep up your monthly contributions and mad not accept your employers contributions, but you are forced by law to take concentration risk on one manager.

At least with this inheritance, you get the perfect opportunity to diversify away from your manager. See a financial adviser and look at the depth of options. 

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.