This article was published on 15 December 2007. Some information may be out of date.

Q&As

  • Courses and grants help beneficiaries set up their own businesses.
  • Big earner is wrong to think KiwiSaver is not for him.
  • Why KiwiSaver money sits around at Inland Revenue for several weeks — although at least it earns interest.

QMy sister is a sickness beneficiary. She is sometimes able to work and sometimes not, so she can’t hold down a regular job.

She’s interested in setting herself up doing production work in the music industry, which she could do from home when she feels well enough. She’s heard of WINZ courses that would teach her how to run a business and perhaps give her money to buy some of the equipment she needs.

She would like to do a course, but she’s worried that WINZ might say this proves she can work and doesn’t need the benefit. She will need the benefit during the course and probably for some time after, until she gets herself established.

What are the rules about this — keeping in mind that she has sometimes found that WINZ officially says something but the case workers don’t always seem to follow the policy?

AThere are indeed such courses. Work and Income — as it is now called — contracts others to run them, and they are free to Work and Income “clients”. While a client is taking a “Be Your Own Boss” course, their full benefit continues.

During the course, your sister would be given help to develop a business plan, which is then vetted by an independent agency to see if it seems viable.

If she gets the nod, she could then apply for an Enterprise Allowance grant and/or subsidy to help her get the business going.

The grant — for start-up costs — is available “where a client does not have access to other commercial finance.” In other words, your sister would have to be turned down for a bank loan first.

The weekly subsidy, which varies depending on living expenses and the expected cash flow from the business, would replace your sister’s benefit. The subsidy is usually paid for 20 to 52 weeks.

Would it be as much as the benefit? “This depends on the needs of the business and the client,” says a Work and Income spokesperson. “Although the business starter will no longer be eligible for work-tested benefits, Work and Income offer many forms of support to workers.” Examples include: an accommodation supplement, a disability allowance, or Working for Families support.

“Theoretically it is possible that the client would have less money than while receiving their benefit, but this is unlikely,” he says. “Work and Income has made an investment in the client and aims to help them make the business succeed.”

If your sister realised after a while that she wasn’t well enough to do the work, she could apply for a sickness benefit again.

She should understand that if she breached her agreement with Work and Income she may have to pay back her grant — through weekly repayments if that’s all she could afford. “However, individual circumstances are taken into account.” If she had to close the business through no fault of her own, the debt may be written off, says the spokesperson.

Anyone receiving financial assistance from the government — including such help as Working for Families assistance or an accommodation supplement — can apply for an Enterprise Allowance. For more information go to www.workandincome.govt.nz. Under “Find a job” click on “self employed”. Or you can ring 0800 559 009.

On case managers not following policy, I guess your best strategy is to get things in writing whenever possible — perhaps through an exchange of emails. It might even be helpful to show the case manager this Q&A. Good luck!

QI think I may be an exception in your belief that everyone should join KiwiSaver. Perhaps I am wrong?

If I joined KiwiSaver I would be required to pay $12,000 a year — certainly for the first year. And I would receive only a guaranteed return of about $1000 a year plus the provider’s eventual return — much of all this in the future — plus the $1000 joining bonus!

Assuming I continued for five years, by which time I could receive the money as I will be 65 on January 2, I will have paid $60,000. But I could have done much better by reducing my mortgage/overdraft, which costs more than $60,000 a year. Plus the opportunity cost — I know I can do better than most corporate investors would provide.

I have taken into account employer compulsory contributions from next year and the increases in the following years too.

I could of course pay for a year and go on a contribution holiday. But in the end it comes down to “why bother?” I don’t need it either — which is probably not the case for 95 per cent of New Zealanders, and I am quite happy to let them have it from my paid tax.

AEither you are paying more than 26 per cent interest on your mortgage/overdraft, or you can make more than 26 per cent on your own investments, or you are, indeed, wrong.

According to the KiwiSaver Decision Guide on www.sorted.org.nz, your KiwiSaver account will grow to about $112,000 in today’s dollars over five years — as long as you stay employed for that period, which sounds like your intention.

The calculator assumes your pay will grow by 3.5 per cent a year — although if it didn’t that wouldn’t make much difference. It also assumes your KiwiSaver fund return will be 2.5 per cent after fees, tax and 2 per cent inflation — which is pretty conservative.

If, instead, you put $1000 a month into another investment, you would need a return above 26 per cent — after fees and taxes and inflation — to accumulate $112,000, according to the Regular Savings calculator on Sorted. That’s extremely unlikely over five years. And in many investments your tax would be higher than in KiwiSaver.

The situation is similar with debt repayment. Your mortgage/overdraft interest must surely be much lower than 26 per cent. So for every dollar you reduce total debt you would be missing out on much more than a dollar in KiwiSaver — such is the power of the KiwiSaver incentives.

Not convinced? You could do even better with KiwiSaver if you set up a salary sacrifice with your employer. But given that merely joining KiwiSaver is a bother, I can’t quite see you taking that extra step.

And, on an income of $300,000, it’s no wonder you don’t need KiwiSaver. Still, how about signing up and giving the money to charity?

Yours was the only response to my recent challenge that “I’ve yet to hear of anyone who can’t benefit from taking part in KiwiSaver at least minimally,” although one other reader finds KiwiSaver “nauseating.” We’ll look at his letter in an upcoming column.

QI am 60 and reasonably independent financially, but still think as a self employed person that KiwiSaver is the best investment going. I am however concerned that the information from IRD is worryingly out of date.

I joined the scheme on day one, and by 11th November, contributions from me and my employer totalled $2192 + $1000 government contribution = $3192.

I received a letter from IRD dated 16th November that shows $692 + $1000 = $1692. There is a small fee subsidy and interest added as well. The huge difference between what has been sent to IRD and what it acknowledges concerns me.

Why is IRD so far behind in this day of data efficiencies and real-time banking? Who is getting the use of my money?

AThe money sits in an Inland Revenue account, earning you 5.36 per cent interest per year after tax — which you don’t need to include in your tax return.

The interest is always calculated from the 15th of the month in which the money is deducted from salary or wages. Presumably that’s to keep calculations simpler, and for most people it should be fair. On some paydays you will lose a little and on other paydays you will gain a little.

No doubt some people who are paid early each month will feel cheated by this, but my response would be, “Pick your fights. There’s not a lot of money at stake here.”

The interest is sent to your provider and credited to your account when Inland Revenue forwards your contributions.

The 5.36 per cent is hardly exciting but, again, that’s not a big deal. Given that we are talking only weeks, the rate will make little difference to your total retirement savings.

But why are we talking weeks? “Due to payroll processes, employers pass contributions to Inland Revenue the month after they have been deducted from salary or wages,” say an Inland Revenue spokesperson. “Inland Revenue then needs to process this information, including checking it is correct.

“Therefore, all contributions you have made may not appear in the letter Inland Revenue sent you on transferring your funds to your scheme provider.”

Still, the process seems unnecessarily slow. And Inland Revenue acknowledges this. “There have also been teething issues which have slowed the processing of funds. This is not surprising given the size of KiwiSaver and its popularity.

“Inland Revenue is working hard to eliminate these problems and is now paying across contributions faster. However, there will always be a lag between deductions being made and funds being passed to a provider.”

Hopefully, then, you’ll see some improvement soon.

In any case there’s one source of comfort in the system. If you have invested in a KiwiSaver fund that’s likely to earn noticeably more than 5.36 per cent after tax, it will be a higher risk fund. There will be times when such funds plummet, and you’ll be glad that at least some of your money was sitting quietly with Inland Revenue.

By the way, non-employees are not caught up in all of this. They make their contributions directly to their provider, and that money should start earning the provider’s return promptly after that.

HAPPY HOLIDAY

This is the last Money column for 2007. Many thanks to everyone who sent me questions — especially the vast majority whose questions didn’t make it into the column. Sorry. Keep trying.

We’ve got one more charity on our Christmas gift list. For $25 you can purchase the gift of sight for a blind person through the Fred Hollows Foundation. Ring 0800 227 229 or go to www.hollows.org.nz.

Have a restful and safe holiday, and don’t put too much on those credit cards! See you again on January 26.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.