NZ Herald 23 February 2008

AFirstly, I would give him a big congratulatory hug for coming home with such good savings. After that it gets trickier.

I assume he wants to own his own home — although not all the young ones have that goal these days. Some build up wealth, sometimes including rental properties, while still being tenants, and there’s nothing wrong with that.

But if he is the typical Homeowning Kiwi type, I can see where your recommendation comes from. Trouble is, it’s not clear that this is a good time to get into the property market.

I hesitate to write that, as I don’t believe in trying to time markets. But there are so many signs that house prices are at least slowing, if not dropping, that it seems mad not to at least be more cautious than usual.

If your son had enough income to buy the sort of property he would like to live in, I would be inclined to say, “Buy now, if that suits you for non-financial reasons. Once you’re in your home it doesn’t matter too much what happens to its value.”

But if he’s a full-time student, he probably won’t be able to pay a mortgage. And while he could perhaps get a section somewhere for $25,000, that’s quite a different type of property. At that price, it will be in a low-growth area, and could quite easily lose value over the next few years. Also middle-of-nowhere sections can take ages to sell.

Even if the section holds its own, the key question is whether it will grow at the same pace as bank term deposits. Their after-tax interest rates are way above inflation, and the risk is practically zero.

I would suggest he shops around for a good rate from a mainstream bank, and parks his money there until he’s earning enough to service a small mortgage. Then he might perhaps buy an apartment.

Please don’t come back in a few years and say, “Apartment prices have risen much more than his savings rose.” That might happen. I’m not a forecaster, and frankly I don’t take much notice of anyone who does try to forecast the property market. Too many factors feed into it.

In the absence of a crystal ball, people in your son’s situation have to make a wise choice and then just cross their fingers. Oh, and promise that if their choice turns out to be wrong, they will shrug and get on with life.

ARelax. You’re not losing but winning — even before taking the KiwiSaver incentives into account. But let’s look first at the process of getting money into your KiwiSaver account.

To keep costs down for employers, Inland Revenue collects KiwiSaver contributions along with other tax payments, in what are called employer monthly schedules. “Large employers file their monthly schedule on the fifth of the month and make payments twice a month, while small and medium enterprises submit them and make payment on the 20th of the month,” says an Inland Revenue spokeswoman.

“This is always a month in arrears. Contributions deducted from salary in August will not be paid to Inland Revenue with the monthly schedule until September. Then they are processed and sent on to the provider.” About 5 per cent of employers file their schedules late, which holds things up still more.

The processing includes checking names and numbers, and errors are quite common — often necessitating contact back to the employer. “Inland Revenue is working on improving processes to ensure these delays are as minimal as possible,” says the spokeswoman.

Generally, the delay shouldn’t be a big problem for a KiwiSaver member, as they are paid after-tax interest of 5.36 per cent a year while Inland Revenue holds their money. The interest is calculated daily and paid when your money is transferred to your provider.

Some people complain at 5.36 per cent, but the level of the return will make little difference to your total KiwiSaver savings over such a short period. In any case, it’s not too bad, given that your “investment” at Inland Revenue is risk-free.

Still, it’s not where you wanted your money to be. So how have you gained? Before the share market fell, the delay meant you had more money sitting in Inland Revenue rather than buying units in your KiwiSaver fund — at what turned out to be relatively high prices.

Sure, after the price fall it was good to be purchasing units in the fund. But you did that, with the contributions you had made a month or so earlier.

And since then there has been a steady flow of your contributions, buying at the lower price levels in much the same way as if the money had gone straight to your provider. I can’t see how having it stop off en route for a little risk-free holiday makes much difference to anything.

To the extent it does make a difference, it was good. If the share market had suddenly risen instead, you would have suffered a little — missing out on the cheaper prices before the rise because of the delay. Be grateful it went the other way.

The bigger point, though, is that all of this will matter less and less over the years. As your KiwiSaver account balance grows, the proportion of your total savings waiting for clearance at Inland Revenue will become miniscule.

P.S. No doubt someone will write in to say, “What about the time my KiwiSaver money is held by my employer before going to Inland Revenue? I don’t get interest on it then.”

That’s true. But, again, it won’t make much of a dent in your long-term savings total. And if employers end up making a bit of interest on that money, I reckon that’s fair enough. They have taken on extra admin and expense with KiwiSaver. I don’t begrudge them a wee perk.

ASorry if I didn’t tell you enough. I don’t want to bore regular readers by repeating all the details too often. But perhaps it’s time to go over this bit again.

You can always put extra money into a KiwiSaver account — for whatever reason — by sending it directly to the provider — the company managing the money. Ring or email and ask how to do this. It should be straight-forward.

Or you can do it via Inland Revenue, in the same way as if you were paying tax. You can deposit the money over the counter at a Westpac bank, or send in a cheque with your IRD number on the back and a letter saying the money is for your KiwiSaver account, or use internet banking. On the internet, use the “pay tax” option, put “KSS” for the tax type, and zero for the period.

Inland Revenue had no comment on your comment about money going into the wrong account, and I have no idea if that happens often. But if it’s your experience, you will probably prefer to send the money straight to the provider.