Q&As
- The pluses outweigh the minuses when putting kids into KiwiSaver
- Some thoughts about reverse mortgages
- Alternatives to reverse mortgages
- An end of year message
QI don’t think it’s a good idea to sign your children up to KiwiSaver. Here’s why:
- They are in for the next 45 years if they are sub 20. That is a long commitment.
- KiwiSaver is ultimately a political plaything. It has been dicked with once or twice already, for example mortgage diversion gone, employer contributions reduced and the tax credits halved.
- How long do you think the two key “outs” will remain — first home buyer incentives and contributions holidays? My guess is they will go too, so you may well be signing your kids up without their consent to 45 years of wage reduction. They might not thank you for that.
That said, it may well become compulsory anyway, like Australia, and when it does the $1000 kick-start will be dropped. So what you are leaving on the table is $1000 that they won’t be able to get for 45 years. If your kids are likely to see this as a life-changing sum, then you have done a bad job and they will be losers anyway.
At the rate at which fund managers earn, the $1000 now will be lucky to be $2000 when they retire, and likely that will buy a big Mac combo. Nice way to retire.
What do you think?
AYou’re right that kids in KiwiSaver are signed up for many years, although — as I said in a recent column — it will be interesting if someone legally challenges that.
That might never happen though. Reluctant KiwiSavers can simply take a contributions holiday every five years. While it’s possible that contributions holidays and first home withdrawals will go, as you say, I can’t see a government doing that unless KiwiSaver becomes compulsory.
Think about it. When people take contributions holidays, the government saves money as it no longer pays tax credits. And first home withdrawals cost the government nothing, and encourage home ownership — which surely every government approves of.
In any case, I expect the vast majority of adults who were signed up to KiwiSaver as children will be glad. Here’s my “here’s why” list:
- Even if they don’t ever make any contributions, their $1000 kick-start will almost certainly grow to way more than your suggested $2000 over 45 years, especially if they choose a low-fee fund. But if you insist, we’ll go with $2000, which means their return after fees and taxes is just 1.5 per cent a year.
At 3 per cent inflation for 45 years, the value of money drops to a bit over a quarter. So the $2000 would buy roughly what $500 buys today. That’s quite a burger.
- Most people will make contributions, in some cases from when they take a part-time job as a teenager. Until they turn 18, they won’t get tax credits or compulsory employer contributions — although some kind employers contribute to kids anyway. But after their 18th birthday, their savings are turbo-charged by the government and their employer.
A young person who starts a lifelong habit of contributing may well retire with more than a million dollars. Adjusting again for 3 per cent inflation, that will buy what $250,000 buys today. Not to be sneezed at.
- KiwiSaver is the best way to save for a first home — assuming that feature does last. You can withdraw not only all your contributions, but also employer contributions and all returns — money you wouldn’t have had outside KiwiSaver. What’s more, if you qualify, you also get up a subsidy of up to $5000. And you’ve still got the $1000 kick-start and tax credits in KiwiSaver as a start on retirement saving.
Recent figures show about three quarters of people in their early 20s are in KiwiSaver. Most will have signed up themselves, rather than via their parents. Sure, some are in default schemes and barely know they are there. But many have clearly chosen to belong. That tells us something.
QI have known about reverse mortgages for some years. My partner and I have no children, and believe we should be able to spend most of our nest-egg within our lifetimes.
It might work well if we are able to live in our present house till we die, but who knows what the future holds?
If one or both of us get a serious health issue, we could find there is not enough equity left to get into alternative housing e.g retirement village or residential care.
AFirst, some background. At a recent symposium run by the University of Auckland’s Retirement Policy Research Centre, two speakers discussed reverse mortgages in some depth.
These loans are typically taken out in retirement, and no repayments are made until the house is sold. If a loan runs for several decades, the borrower repays many times what they borrowed, because of compounding interest. But still, the loan enables the homeowner to make use of their equity.
One speaker, Judith Davey of Victoria University, listed five “deeply held beliefs” that work against the acceptance of reverse mortgages. They are:
- “It is important to be debt-free.
- “A mortgage-free home is a strong aspiration and part of New Zealand ‘psyche’.
- “It is ‘nice’ to leave an inheritance for one’s children.
- “Older people are entitled to support from society through government — ‘It is my turn now’.
- “Suspicion of commercial equity release schemes.”
However, another speaker, Rob Dowler of the Safe Home Equity Release Plans Association, said he thinks attitudes are changing.
Many baby boomers, he said, are short of retirement savings because of: loss of wealth during the global financial crisis, higher debt at retirement, increasing health costs and improving longevity.
Also, boomers are thinking differently about the need to leave an inheritance, and many want to grow old at home, “maintaining independence, mobility, and remaining near known amenities and friends.”
But that doesn’t mean boomers are rushing to sign up for reverse mortgages, and neither should they.
In your situation, there’s no issue about children’s inheritance. But still, you’re hesitant. You might find the next letter helpful — perhaps substituting other relatives for children.
QYour answers in recent columns about reverse mortgages, while full, could have covered the alternatives as well.
Whether an elderly person should remain in a particular home, even considering the sentimental attachment, is the first question to ask.
Selling down and buying a smaller replacement property should be dispassionately considered. And for some, investing the net proceeds of sale and renting or moving to a retirement village are two further options.
Other options are for family members to guarantee an increase to an existing secured bank loan or a new loan, or to borrow from their mortgagee and on-lend to the parents.
One option I have successfully implemented for clients is a partial “buy-out” by family (four children in one instance) of a portion of the family home. A co-ownership arrangement is created, with the parents having exclusive right of occupation until sale or death.
The details are recorded in a property sharing agreement that also deals with responsibility for maintenance and outgoings such as rates, and division of the proceeds on eventual sale. This does depend on children having access to money, but sometimes all that is required is $40,000 to $80,000, and that may be divided up. A contribution to or ultimate reimbursement of the interest cost can be written into the agreement if desired.
Taking in a boarder or renting part of a home may seem attractive options. But both can impinge on privacy and would require management that may be beyond an elderly single person. A subdivision may also have initial appeal, but costs are high and the process is not without difficulties.
Reverse mortgages are expensive and can be final. Consequently, a commitment to one should be well justified. I have one client couple who cannot get out because their remaining equity is too low to enable them to buy elsewhere, and because of age and low income they cannot borrow again. They are stuck.
Nice advert for the particular bank but not the full story. Family meetings sound good, but not all families are “happy families”! And the issue of inheritances is fraught with varying expectations within a family.
With that said, all options should be analysed with an experienced and independent legal adviser, with an eye on the retirees’ present and foreseeable needs, such as health services. In some instances a reverse mortgage can be the preferred option, but not always.
AThanks for lots of ideas. I fully agree that readers should discuss their options with a lawyer — as long as the lawyer knows what they’re talking about. When it comes to financial issues, lawyers are a mixed bag.
One issue to seek advice on is the possible impact of any of these arrangements on getting a rest home subsidy. Early in the new year, this column will include some Q&As on that important topic, plus other aspects of reverse mortgages.
A final quibble: I’m a bit miffed at your suggestion that I gave ASB a free ad a couple of weeks ago. I did stress that the “big worry” of reverse mortgages is how rapidly they grow, and that “the loans are not cheap” (she says defensively!).
SEE YOU NEXT YEAR
Another year of Q&As comes to an end, with my unanswered questions file bulging more than ever. Thanks so much to everyone who writes, and sorry to the majority whose questions don’t make it into the paper. The column wouldn’t work without you all.
Thanks, too, for all the kind comments, which I edit out but do appreciate. Just this once, though, I thought I would publish one reader’s email:
“I just want to share my respect for your advice after following your column over the last 7-plus years. When I first started reading I was an American living in New Zealand. However, my kiwi wife and I have moved back to the USA.
“Through the good and bad (pre global recession and post global recession), I have found your instincts and philosophy to be helpful, and grounded in common sense. Even 2.5 years after moving back to the USA, I still check in to read many of your Saturday columns. I haven’t found a comparably well-grounded financial writer in the USA, so yours still shines through as among the best I have ever found both home and abroad. Thanks, keep up the good work.”
And he didn’t even want a question answered. Nice, eh!
My final suggestion to readers for 2012: Don’t spend more over Christmas than you can pay off in January. Okay, February if you must — but no later than that.
Meantime, here’s to safety, siestas and sunshine.
Merry Holm
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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.