NZ Herald 21 February 2009

AIt’s great that you joined KiwiSaver. You now have several thousand dollars more than you would have had if you had saved elsewhere.

At this stage, though, I suggest you not only stop contributing — which you can do any time as a non-employee — but get your money out and spend it.

A member of KiwiSaver can withdraw all their money if they are “permanently and totally disabled, or near death”, so I imagine you would qualify. Ask your provider.

Generally, it makes sense to save for future spending only if your income is higher now than you expect it to be later — after allowing for inflation. Most of us expect to earn less in retirement than while we are working, so we save.

But in your case, you are likely to be on a benefit for the rest of your life, which hopefully will maintain its value relative to inflation. Even if it fell a little, your spending will probably also decrease over time.

If I were you, I would get my money out of KiwiSaver, perhaps add any other savings I have, and eat, drink and be merry. All the best.

AGosh, you certainly don’t have a lot to come and go on. Many people earning much more than you say they can’t afford KiwiSaver, so good on you for considering it. And, in fact, it should work well or you.

Let’s start with your questions. Yes, you can join KiwiSaver, and you’ll receive the same incentives as other non-employees — basically the $1000 kick-start and the tax credit, which matches your contributions up to $1043 a year.

As a non-employee, you can contribute as much as you want, including nothing, and you can stop contributing whenever you wish. Only employees have to take contributions holidays.

Should you join? Definitely, at least to get the kick-start. It’s free money.

Whether it’s good for you to contribute is less clear. You’ve got a longer time horizon than the previous correspondent, and it seems a pity not to get the tax credits — which, by the way, are government gifts that have nothing to do with tax.

Still, if I were you I would be reluctant to lower my living standard now in order to have more money later.

There’s a great way around this, though, if you have an obliging family member or friend. And they could gain from it too.

It’s what I call sponsoring someone into KiwiSaver. Your friend pays $87 a month into your KiwiSaver account until you turn 65 — let’s say seven and a half years from now. That will give you the maximum tax credit.

If you invest in a fairly conservative fund, your return might average 3 per cent a year after fees and taxes. By the time you reach 65, your account would be worth around $18,100.

At that stage, you pay your friend back, with interest. Using the Regular Savings calculator on www.sorted.org.nz, you feed in $87 a month over seven and a half years, and a generous interest rate of, say, 7 per cent — considerably more than the friend could get in a bank.

The calculator shows you would owe your friend about $10,200. The remaining $7900 is yours.

What’s more, if your friend would be happy with 4 per cent interest, you would owe just $9100, leaving $9000 for you.

Where has the extra money come from? Taxpayers — plus returns earned on the taxpayer money. And why shouldn’t you get your share?

AThat’s a great idea from April 1 on, as long as you earn more than $52,150.

If you earn less than that, your 2 per cent contributions to KiwiSaver will total less than $1043 a year, so you won’t get the maximum tax credit. People in that situation should try to boost their contributions to $1043.

But once you have put in $1043 each year — or 2 per cent of your pay if it’s more than that — there are no incentives to contribute further. And the big disadvantage, as you say, is the lack of flexibility.

For most people, it’s best to put any further savings firstly into repay any high-interest debt, then your home mortgage. But in your case the other super scheme is even better, given your employer’s generous contributions. And, as you say, you may later use the money for mortgage repayment.

We should note, though, that some people will prefer to keep contributing 4 per cent of pay to KiwiSaver, or even 8 per cent. They include those who haven’t got much self discipline and would spend their savings if it weren’t tied up.

Other reasons for employees without mortgages or other debt to contribute more than 2 per cent include:

• You like the ‘painlessness’ and simplicity of regularly contributing to KiwiSaver.
• You prefer to keep your savings simple, all in one account.
• You don’t want to go to the hassle of selecting and setting up an alternative savings plan.
• The fees and/or taxes are lower than on alternative savings plans that appeal to you.
• You already have enough investments that are not locked up to meet any pre-retirement needs.

AI did say, last week, that the interest received by the in-laws, who would be lending the money, “would be taxed if they do the right thing legally and declare the income.” But I didn’t realise the obligations of the couple paying the interest. Thank you for enlightening us all.

Inland Revenue confirms what you say. In the department’s words: “If the arrangement requires the borrower to pay $5,000 or more interest a year then they must register with Inland Revenue as an RWT payer, as the arrangement described does not seem to be one of the exceptions to the resident withholding tax rules.

“This does mean that the borrower will incur the compliance costs associated with being a RWT payer, and potentially expose that person to late penalties etc if they do not comply.”

The IR283 booklet you mention lists exemptions, including interest paid on trade credit, hire purchase and Bonus Bonds, but not on a family loan like the one we discussed.

It all sounds pretty complicated, and could make the whole idea unworkable, with accounting fees eating up a big chunk of the interest savings. In any case, as stated last week, there are other pitfalls too.

A pity really. In theory at least it’s good to cut out the middle man.