NZ Herald 16 July 2011

AIt’s funny how an unusual situation can get you thinking beyond the obvious.

When we look at your parents’ first two options — remaining as homeowners or renting so they can “eat their house” — the same choice applies to many other retired couples with a mortgage-free home and little income beyond NZ Super. But usually selling their house doesn’t occur to them. In your parents’ case, though, they have to move — which presumably has prompted you to consider all alternatives.

However, I don’t like the renting idea much, for one simple reason: security.

They don’t know how long they will live, and if they rent they might run out of money. Worry about that possibility is likely to curb their spending on fun. It’s one thing getting by on NZ Super if your accommodation is taken care of, quite another if it’s not.

What’s more, renters can’t put down roots in the same way. They might be restricted in changes they can make to a house or garden, and they never know when the landlord might kick them out, or raise the rent unreasonably.

Of course there are pluses for renters. You can move quickly and easily, and you don’t have to worry about maintenance and other responsibilities. But the pluses are unlikely to outweigh the minuses for retired people. The smaller house in the outlying suburb would probably work better.

Your parents, though, have another option — becoming your near neighbours. And if the house you build would be too small for their liking, presumably they could lend you $200,000 or $300,000 for a bigger place and still have some spending money.

The main factor here is that you are giving them free use of the land, releasing money that would otherwise go into land ownership. It’s an appealing idea, assuming they are happy to move to your area.

One thing to consider, though, is that as they grow older, they probably won’t have as many nearby friends and support people as they would in Christchurch. Does that sit well with them, you, and other family members?

Speaking of your kin, I suggest you talk the whole thing through with them, including what would happen when your parents die, or move to a rest home or elsewhere.

Would you sell their house and give back the proceeds — minus the value of the land — to your parents or their estate? How and when would the land be valued? And what if the house, minus land, sold for lots more than your parents had put into it? Would you keep all or part of that gain, or none of it? What if the opposite happened, and there was a loss?

There are several different “fair” ways to answer these questions.

I’m not trying to discourage you from what could be a really good outcome. But before your parents make plans to move north, I would recommend an honest family discussion and a written document, signed by everyone, that spells out what happens in different scenarios.

It might be wise to involve a lawyer. That might seem heavy handed, but I’ve seen previously happy extended families split over lesser issues than this.

Finally, I want to commend you for thinking the way you do. Some people, with their eye on inheriting a portion of their parents’ home, wouldn’t entertain the idea of Mum and Dad blowing the lot. Good on you!

AZero. (I always wanted to be able to do a one-word answer. Mind you, now that I’ve added this bit, I suppose I’ve spoilt it. And in any case, strictly speaking I should have said, “An infinite amount or zero.”)

AI think your sons are being overly cautious. It’s true that once the girls start working, even if it’s when they are young teenagers, 3 per cent of their pay will go into KiwiSaver. But if they don’t want that to happen — then or at any later stage — they can easily take a contributions holiday. And they can renew the holiday every five years until retirement.

Those rules could change, of course. But I can’t imagine a government stopping contributions holidays, because that would put off new enrollees. The exception would be if a government makes KiwiSaver compulsory. But if that happens, the girls would be put into the scheme anyway.

As for the long-term future of the scheme, I wonder what your sons have in mind. Sure, KiwiSaver balances will be affected by market conditions, but history suggests they will grow over time. And, with the scheme’s huge popularity, no government is likely to take steps that would make members wish they hadn’t joined.

AAnother set of lucky grandkids!

There’s no tax break in KiwiSaver, but there is a misleadingly titled tax credit — which has nothing to do with tax — that starts from age 18. You get 50c for every dollar you contribute, up to $521 a year on contributions of $1043. Also, if you are employed, your employer contributes 2 per cent of your pay, rising to 3 per cent from April 2013.

The value of the grandchildren’s accounts over the years will vary hugely, depending on how much they earn and contribute and how the money is invested. But under the present scheme it won’t be unusual for those who join as little ones to retire with more than $1 million, in some cases much more. Even after adjusting for inflation, that should still make for a jolly retirement.

On access to the money, the housing withdrawal is only for the purchase of a first home. The grandkids might also get a first home subsidy of $3000 to $5000. Withdrawals are also permitted if they suffer serious financial hardship or illness, or in some situations if they go overseas.

Retirement withdrawals start at the age NZ Super starts. That’s currently 65, but is likely to be older by the time your grandchildren get there.

One other point for you and the previous correspondent. If you are under 65 and haven’t joined KiwiSaver yourself, it’s better to do that than to sign up the grandkids. You don’t have to wait to turn 18 before getting the tax credit, so your account would grow faster than theirs. And you can always put the money in the grandchildren’s KiwiSaver accounts once you reach NZ Super age.

AYou are doing a modified version of what we were discussing last week, in that you charge a base fee regardless of performance. That smoothes out your income considerably. But still, our reader who couldn’t find anyone willing to operate on a performance fee basis may want to contact you.

I should note, though, that your firm is not a one stop shop for all investment advice. According to a disclosure statement from one of your authorized financial advisers, “Milford does not give specific advice on some of the wider issues you may need to consider such as estate planning, taxation and insurance planning. Should you require this specific advice you should seek additional separate professional advice.”

Furthermore, the statement says, “I typically recommend the purchase of any investment on the Milford investment list (which will change over time) or investment in a Milford Unit Trust PIE fund…. For investments outside Australasia I recommend investment managers other than Milford Funds Limited.”

Anyone who wants their adviser to consider a wide range of investment options may want to go elsewhere.