Financial Steps After Permanent Residency
There has been a truckload of residency visas approved in the last month or so. I know the wait has been a bit like waiting for a bus, so it’s a good time to provide info on the financial steps most will consider when they get that elusive residency visa in the bag. I will share some knowledge about the 4 areas that Windsor Wealth advise on which are, buying a property (mortgages) insurance, pensions transfers, and kiwisaver.
Property Purchase
A 20% deposit makes the process a heck of a lot easier and leaves you less dependent on banks appetite to lend.
A 10% deposit is workable right now but there is less certainty for buyers who are in this zone. Banks will serve their own customers ahead of new to bank customers so couples in preparing to buy with low deposit should have a bank account with a different major bank each. Have a bet on 2 horses in the race instead of 1.
Banks are legally required to do the vast majority of their lending with 20%+ deposits. New builds are exempt from these lending requirements so it is easier to get low deposit lending on new builds. Be mindful that this accessibility leads to more demand for new build compared to existing property. If I had a 20% plus deposit I would be targeting existing property in the current market as it may be easier to get value for money. (less buyers) The property market is a whole load of micro markets though so your strategy will depend on location
If you have a residency visa but have been a tax resident in NZ for less than a year, you would need OIO approval to be able to buy. In our experience this has always been approved very quickly. It just costs $2k. It’s not a hard process at all.
With mortgages you don’t need to get a credit card to prove your credit worthiness. You are innocent until proven guilty with the lenders so you are ok as long as you don’t commit any financial crime such as having your Vodafone direct debit payment bounce after changing bank accounts. In fact getting a credit card even with a zero balance will count against you somewhat in the banks calculation of what you can borrow.
At the time you set out to buy a property, we don’t know what bank has the sharpest rates. We seek to get pre-approval from 2 banks so you can go ahead and put an offer in knowing that the bank has at least signed off on YOU. The bank will still need to accept the property as a security so any offer should be “subject to finance, builders report and LIM report” (usually 10 working days but sometimes we need a longer clause if valuers are in short supply for example)
If you go to auction you need to make an unconditional offer which means you need to perform all due diligence before making an offer. This can be expensive if you keep missing out (and soul destroying)
A good property lawyer is hugely important. I have seen poor performance in this area create all sorts of stress whereas good performance will be proactive and avoid drama late in the process. You don’t need to have an Auckland lawyer and pay Auckland prices. There are excellent lawyers who can work entirely by Zoom.
Banks will usually pay a cash contribution at the start of a new loan. This varies but we have recently been getting around 0.7% of the mortgage as an up front cash contribution. When I got mortgages in the UK I had to pay the banks a decent admin fee for the privilege of borrowing so a golden hello is welcome but don’t be fooled, it is baked into the banks margins here and then some.
Mortgage brokers are free to use. We earn commission from banks. Recently we have been able to secure discounted rates but sometimes there are no discounts to be had apart from negotiating higher cash contributions. The real money saving is over the years where excellent advisers will help you to have the right structure which should take years off the life of your mortgage.
Insurance
Once you have bought a property or decided to stay on in NZ for the long haul, you probably want to look at personal insurance to protect the home in case of bad health or bad luck.
Insurance brokers are free to use. We earn commissions from the insurers and you don’t get better premiums by going direct.
A good broker will compare the market for prices and quality. The cheapest insurance is very unlikely to be the most suitable.
As you get older life insurance gets more expensive so we need a plan to shrink your mortgage and grow your kiwisaver and other wealth so that you can shrink your life insurance need. Eventually it should come down to zero as life insurance should not be treated as jackpot money. It’s basic risk management.
Income protection is to keep you able to support yourself and your family if you are unable to work. ACC in NZ will pay 80% of your income if you can’t work due to accident but this only covers 20% of situations where people can’t work. Most people in NZ are extremely under insured for income protection probably because it is not as well understood.
Medical insurance is less of a necessity than life and income protection at first glance but be aware that there are a lot of effective superexpensive drugs that are not funded by the health system. I have seen situations where a requirement to access these “non pharmac” drugs to stay alive have led to people needing to spend $10,000 for treatment. This seems like a lot but the catch is it is $10,000 every 3 weeks. Some medical insurance providers offer non pharmac provision for $300,000 per year or more. This is important in my experience.
Pension Tansfer to NZ
We advise on mainly UK and Irish pensions so my comments are restricted to these countries
There are a lot of pros and cons of transferring your pension to New Zealand and this is an ultra nuanced area
The main reason people want to transfer to New Zealand is that this will allow them to access the pension in full without tax from age 57 (might be 55 for some)
Another good reason is just to be able to keep track of the pension. I know my pension provider in UK moved from Axa to Friends Provident to Aviva. I picked up on the first move but wasn’t aware of the 2nd move. I hate to guess how many changes will occur in the next 20 years.
There are also reasons not to transfer. Especially if you plan to move to a country like Australia within 5 years. I wouldn’t be too concerned if there is a risk of moving back to UK as that situation can be dealt with. . Another risk is if you would be giving up a guaranteed income (sometimes it still pays to transfer, sometimes not – the devil is in the detail)
UK pensions take around 3-6 months to transfer on average but can easily take longer. The process is getting more bureaucratic and not less as there have been a lot of pension scams, cold callers, pressure sellers that has resulted in extra checks being required from pension providers. Good advisers will take care of the paperwork and chase the pension companies so that it is low hassle for you.
Pension transfer seems to be focussed by most on the transfer decision/transaction (the tax basically) but this is your pot of money that needs to work hard over maybe 10, 20, 30 years, so the investment allocation is at least equally as important as the focus on tax.
You can’t transfer your UK pension into Kiwisaver. If you transfer to New Zealand it needs to go to a QROPS (Qualifying Recognised Overseas Pension Scheme)
Like all advisers I am aware of, we earn an ongoing investment management fee. Some advisers charge a large up front fee to advise on a transfer. Some charge a small amount, and some don’t charge at all. We found that we can be successful without charging up front at all, and so we don’t
For Australian super you can transfer into your kiwisaver fund usually quite easily. I’ve found 50% of people transfer into NZ, and 50% are happy with their Aussie Super fund.
Kiwisaver
There are more than 30 funds to choose from and it is in your interest to make an active choice about this as performance varies widely, and makes a huge difference over the years.
Don’t choose your bank just because you know who they are. Investment specialist funds on the whole have performed better than banks
When looking at performance, look at 5 years + A lot of people focus on 1 year of performance but this is meaningless as it can just be dumb luck
We also look at the investment process and fund manager movements and advise clients if we think they should change provider.
Try to use a growth allocation if you can. If you are older you may want to be lower risk but keep in mind that if prices go down, you will keep buying each month at lower prices.
Kiwisaver can be accessed in full tax free at retirement age (currently 65)
Kiwisaver funds are protected by a government approved custodian. You are not exposed to the financial fortunes of your kiwisaver provider. If they go down, your kiwsaver still stands up.
All these areas are nuanced and the key word in personal finance is the word personal.
If you want to talk to us for support or KiwiSaver advice in any of these areas, just get in touch. I know many of you have been waiting quite some time for this!