Crisis has massive impact
Consider mortgage repayment holiday writes SHELLEY HANNA
Everyone is in the same boat dealing
with this unprecedented
situation and banks are already talking to affected
clients.
QI am in my mid 30s and I have $14,900 in a growth KiwiSaver fund (down from $18,000 before Covid-19). I bought a house five years ago, and I’m now servicing quite a large mortgage. I work in the hospitality sector. Because of the Covid-19 outbreak my boss has sent me home. I am hopeful that the government package will help me meet my basic living expenses, but if it’s not enough should I try tapping into my KiwiSaver? I have seen the balance falling — should I move to a lower risk fund now just in case?
AThat is a very good question. As most people know, KiwiSaver is a longterm retirement savings scheme with very limited opportunities to withdraw before age 65. These opportunities are for a First Home, Serious Illness, Permanent Emigration and Significant Financial Hardship (or SFH).
The Covid-19 crisis has had a massive social and economic impact on the world, and financial markets have reacted by dropping sharply. Until the situation improves, markets are likely to fall further. Then at some point they will see light at the end of the tunnel, and the trend will be upwards. But right now we don’t know when this will happen.
Ideally long-term investors should sit tight and ride it out, rather than crystallise losses by switching to a lower risk strategy during the crisis.
Before tapping into your KiwiSaver, you may be able to talk to your bank about a mortgage repayment holiday. Everyone is in the same boat dealing with this unprecedented situation and banks are already talking to affected clients.
KiwiSaver providers too are receiving many questions from their members. Some members are confused as to why their balance is dropping at all. They do not understand the make up of their fund and the difference between conservative, balanced and growth. It is unfortunate that it has taken a crisis for these people to start taking an interest in their KiwiSaver accounts.
If you think there’s a high chance you will need to tap into your KiwiSaver, you could ask your provider if you can switch say half your account into a lower risk fund now, with a view to accessing that portion in a worse case scenario. It is important to note that this would depend on the rules of your particular KiwiSaver scheme. It may not be possible to divide your savings in that way, or to specify where withdrawals will come from. Many schemes make withdrawals pro rata. If you can find the SFH application form on your provider’s website some of your questions may be answered.
There is a good argument for some KiwiSaver investors to split their savings between lower and higher risk funds, particularly those members approaching 65. Hopefully then at times like this they can tap into their lower risk savings, while leaving the rest to grow over the longer term. It would not be difficult for KiwiSaver providers to add this option to their schemes, particularly if they want to retain members past age 65. This would also be helpful for younger members who have a tight budget and a higher likelihood of making a SFH application.
Note that every application for Serious Financial Hardship must be approved by the trustees.
Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 06 870 3838 or go to peak.net.nz. The information contained in this article is
of a general nature and is not personalised. Send your KiwiSaver questions to shelley.hanna@peak.net.
nz