This article was published on 15 October 2016. Some information may be out of date.

Q&As

  • Like it or not, retiree didn’t directly contribute to NZ Super he now receives
  • Buying leasehold property is for high risk takers only
  • KiwiSaver first home withdrawal rules much less than grant rules
  • Dividends beat bank interest, but riskier

QHaving chewed this over, over recent years, I really must take issue with your statement in the Herald two weeks ago, “none of the money we pay in taxes in our working lives is set aside to pay our N.Z. Super”. Having said that I must acknowledge that you and anyone else is only as good as the information supplied them.

When my wife and I came to New Zealand all those years ago all wage and salary workers had to:

  • Complete a tax return as at 31 March each year and,
  • Complete a social welfare return for the same year end date. This payment we had been led to believe partly went toward NZ.Super.

Some time around 1970 a young minister of finance in Keith Holyoake’s government said “Filling in two forms for the same department is silly. We will have one form and one payment for everything. However, we will ring fence the social welfare payments and keep them separate from the direct tax payments.”

Therefore some of us will go to our deaths believing we have paid toward our Super.

It was not until the 1980s and Roger Douglas that this nonsense of not having paid for Super came about — just the same as claiming the Super was not taxed and slapping another direct tax payment onto it. A topic for another day do you think?

AI’m afraid you were misled.

“The political game started about 30 years before the government decided in 1969 to amalgamate ‘Social Security tax’ into income taxes,” says Michael Littlewood of the University of Auckland’s Retirement Policy and Research Centre. He’s obviously referring to your “around 1970” change.

“Some in the 1935 Labour Government wanted ‘Social Security’ to be largely self-supporting, financially. As still happens in many countries today, the mechanisms of separate funds and an identified ‘tax’ were initially proposed. But when the first Labour Government got down into the numbers, they realised that they couldn’t achieve what they wanted to achieve,” says Littlewood.

“So pre-funding was quietly abandoned in favour of pay-as-you-go financing, but without dismantling the ‘Social Security Fund’ and its associated ‘tax’. However, that fundamental shift in financing was not well-advertised.

“The 1938 benefits and their subsequent improvements were never paid from just the ‘social security tax’,” he says. Other tax money was also used. And no money was set aside for future benefits.

After the amalgamation in 1969, “The charade of the ‘Social Security Fund’ and ‘contributions’ towards both the pension and all other benefits disappeared,” says Littlewood. “Separating taxes as New Zealand used to do was complicated and an unnecessary fiction and that’s why the 1969 change was made.”

Please note that I’m not saying you don’t deserve your NZ Super. When you were working, some of your tax dollars were going towards Super for retired people then. And now it’s your turn. It’s just that there’s no stack of money that you paid into.

Note, too, that one of the highly praised attributes of NZ Super is that people get it even if they have never paid taxes. This includes people with health and disability issues and — in the past at least — women who stayed out of the work force to raise a family.

On your final point, today is as good as another day! But it rather depends on how you look at what actually happened, as outlined above.

In any case, the government could make NZ Super tax-free, and simply pay everyone a lower amount to compensate for that. But that would mean people on million-dollar incomes would get the same Super as those earning no other income. Do you want that?

QI am looking at purchasing a leasehold property. My main reason for this is to get out of renting, which has become increasingly more expensive.

I have looked into mortgage options, but these are limited for me due to my age and income. Buying a leasehold property priced at around $100,000, with a low land lease for the next decade, I thought could possibly be an option.

I realise the risk with buying leasehold is the unknown of how much the lease will increase in that period of time.

Are there any other options for an older person to buy a property that would be their first home, using their KiwiSaver as deposit?

AAre you a high-risk investor? No? I didn’t think so. So please don’t buy a leasehold property.

Whenever something is much cheaper than you would normally expect, it’s wise to look into the reasons before buying.

Leasehold property can seem ridiculously cheap, but that’s because hardly anyone wants it. When the lease is renewed, the new rent will probably be based on increases in land values in the area. And over long periods those increases can be huge — especially in Auckland these days.

In 2013, Anne Gibson wrote in the Herald about a woman who abandoned her property after leasehold payments zoomed from $8300 to more than $70,000 a year. Of course nobody else wanted to buy the house after that, and she couldn’t afford the lease payments.

That was an extreme example. But even if your payments rise by much less — and you can afford the new payments — the property may well lose value, making it difficult for you to move from there.

Perhaps you could sell before the payment review. But I doubt if you would find many buyers.

This is a game for someone who can afford to lose at it — maybe someone who buys ten cheap leasehold properties and some turn out well because they were so cheap, making up for the disasters.

So how else could you buy a home? Talk to a mortgage broker. I’ve been surprised at how much people who are no longer young can sometimes borrow, especially if they have a decent deposit in their KiwiSaver account. They’ve been paying rent, so why not mortgage payments?

But you might still be limited to the usual lower-cost options — an apartment or unit or maybe one of those new really small prefabricated houses. I’m assuming you live in Auckland, so there’s always the possibility of moving elsewhere, or taking on a long commute. Some train commuters enjoy the chance to do lots of reading.

Sorry I can’t be more encouraging. But if you’re determined, you’ll get your own place somehow.

QMy employer recently started giving a 3 per cent allowance to those that aren’t contributing to KiwiSaver in order to be fair to everyone.

I decided that cash is king, so took a KiwiSaver contributions holiday and got the cash instead. I put the 3 per cent employer contribution and my own 3 per cent contribution into an online account by automatic payment. I can’t withdraw from the account online.

I wanted to demonstrate a regular savings history, and also have funds available for a deposit on new apartment developments, which are very competitive. You need to put your 10 per cent down right away in order to secure your apartment.

Often you don’t take possession until 24 months from the time you put your deposit down. If you snooze you lose. You need to have the confidence to say, “I have the cash”. You don’t have time to be waiting on KiwiSaver to come through, and I’ve heard terrible stories about this.

I made sure I didn’t miss out on the government tax credit this year. However, I’m concerned I’m no longer a regular contributor to KiwiSaver and that I potentially don’t meet the criteria in order to make a first home deposit withdrawal. “Regular” seems a bit subjective.

I can’t seem to find clear information on this anywhere, and I certainly don’t want a nasty surprise when I eventually ask to make a KiwiSaver withdrawal. I’ve been a member since 2009, and I’ve taken several contributions holidays over the years for various reasons.

AThis is a common misunderstanding. There are two separate aspects to KiwiSaver first home help: withdrawing money, and receiving a HomeStart grant.

There aren’t many rules for withdrawals, and it seems that’s all you want to do. Basically, you just have to be a member for at least three years, with no contributions requirements. And you have to use the money to buy your own home, not a rental property.

By contrast, to get the grant you have to have contributed regularly for at least three years — at minimal levels that have varied over the years — and there are income and house price caps, which I’m assuming count you out.

For the withdrawal, in most circumstances you can take out everything in your account except $1000. However, if your employer has made extra contributions above the required 3 per cent, that money might have to stay in your KiwiSaver account.

To make the withdrawal, apply to your provider. You could ask them now how long that would take. Long delays are more likely to apply to the HomeStart grant, which is run by Housing NZ and is more complicated.

A few other comments:

  • I suggest you keep putting $1043 a year into KiwiSaver — perhaps via automatic transfers of $87 a month — so you still get the maximum tax credit.
  • Your online account might not give as high a return as KiwiSaver — although if you’re planning a first home withdrawal in the next few years you should be in a low-risk KiwiSaver fund, so there might not be much difference.
  • Putting money down 24 months before you get an apartment is a bit scary. Make sure the company has a good track record.

QI just received a letter from our bank in the UK to say that the interest rate on our savings account was going down from 0.1 per cent to 0.05 per cent. Thought our local savers complaining about low interest rates might like to know how much better off they are.

Buy more shares! Dividends are much better.

AAs Fred Dagg used to tell us, we don’t know how lucky we are — and it’s certainly true these days on interest rates.

Still, dividends are generally higher than bank account interest, especially on New Zealand shares. What’s more, dividend imputation gives New Zealand investors a tax break.

But you must be prepared to see the value of the money you invest fluctuate with the share market. And dividends are a more moveable feast than bank interest. Companies can and do change their dividend rates to suit them.

By investing in many shares — or perhaps a share fund that specializes in companies that pay high dividends — you can spread your risk. Then if one company slashes its dividend it doesn’t have much effect. But if the economy turns down, quite a few companies might cut dividends at about the same time, and you could see your income plummet.

It’s the same old song: higher return comes with higher risk.

Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd FSCL, a seminar presenter and a bestselling author on personal finance. 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.