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Switch to lower risk can be wise
 
Q.          My wife and I plan to buy a house using KiwiSaver before the end of the year. We have worked out that by December we will be eligible to withdraw around $35,000 between us. We are both invested in a growth fund and it has done really well over the past 3 years averaging nearly 10% per annum. But the situation in the States is worrying me and if it continues our KiwiSaver balance could go down. How do we switch to a lower risk fund and is this a good idea? 
 
A.            With KiwiSaver balances growing, more and more investors like you are taking advantage of the First Home Withdrawal option. Anyone who has been in KiwiSaver for 3 years or more and is looking to buy their first home can apply to withdraw all their own contributions, their employer contributions and investment earnings to put towards the purchase. Now that KiwiSaver has been going for more than 6 years, there is quite a lot of money involved in these withdrawals.
 
You are correct in your thinking - a growth fund is not the best place for any savings that you are planning to use in the short to medium term.  In fact, any KiwiSaver investor planning to make a First Home Withdrawal within the next 5 years should be thinking about their timeframe, and the suitability of the fund they are invested in. Usually younger investors are directed into higher risk funds, as they have the longer timeframes. The First Home Withdrawal is the main exception to this rule.
 
NZ Funds Management, a fund manager based in Auckland, runs a KiwiSaver scheme which offers investors annual reweighting from higher risk to progressively lower risk from the age of 45.  One of the principals of the firm, David van Schaardenburg, commented “While we have a lifecycle solution that allocates substantially towards growth assets when people are young – and their investment horizon is long – if they are planning to use the KiwiSaver First Home Withdrawal within 5 years we normally recommend they substantially if not completely allocate to our lowest risk portfolio.  This perspective has nothing to do with any current market or economic news but merely reflect growth assets will often be volatile in value over short term periods.”
 
KiwiSaver investors have almost forgotten what poor performance looks like, as recent returns have been so strong. Morningstar’s quarterly report to 30 June 2013 shows the average return for the KiwiSaver growth funds they report on was an impressive 16.8% before tax over the past 12 months. But any growth fund that can go up by 16.8% can also go down by as much. If you put in your application in December and found yourselves with $5880 less than you expected (or 16.8% of $35,000), this would make a big difference to your house purchase plans. 
 
I can’t give you advice about the fund you are in and which one you should switch to – your fund provider should be able to help you with that. Contact them directly on their 0800 number. If you don’t initially get the help you expect, be persistent until you do. There are 28 different providers offering KiwiSaver and the level of service varies quite considerably. As KiwiSaver balances grow, I expect more investors will get disgruntled with the limitations of certain providers, and switch to others with better communication and support. Those with the lowest fees may offer a more basic level of service than those who charge a slightly higher fee. To some extent, you get what you pay for. 
 
 
Shelley Hanna is an Authorised Financial Adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 870 3838. The information contained in this article is of a general nature and is not intended to provide personalised advice. Send your KiwiSaver questions to shelley.hanna@peak.net.nz