- Nearly 65-year-old should grab chance to join KiwiSaver. People over 60 do particularly well out of it.
- Why dividends should be included when we look at the performance of the NZ share market.
QI am retired, and will be 65 on July 4 this year, when I will qualify for NZ Super.
With only July 2 and 3 available for me to register for KiwiSaver I need answers to my questions now.
Most importantly, if I elect to join KiwiSaver, will I receive the $1040 tax credit against the tax I have to pay on my NZ Super and on interest from a fixed deposit?
If I contribute $20 per week for five years will I receive in July 2012: the $1000 kick-start, plus five times $1040 for my contribution, plus five times $1040 from the tax credit, plus interest?
Please advise, as IRD will not take my calls. They are on overload.
AAren’t you lucky you weren’t born a week earlier — in which case you would have missed out on KiwiSaver.
It’s great that you realise how important it is to sign up before you turn 65. All other 64-year-olds should do likewise. There’s more gain in this than many people realise.
Firstly, though, you don’t have to wait until July 1 to sign up. At least some providers are taking applications now.
The answer to your first question is “No”. It’s confusing that the government is calling its contribution of up to $1040 a year a “tax credit”. It is not a credit against tax you have to pay.
It follows then that you don’t have to be a taxpayer to get the credit. It’s simply an annual gift, which is tied up in your KiwiSaver account along with all the other money.
“Yes” to your second question. You will get $11,400 plus returns — although the returns might be dividends and/or rent instead of interest, depending on what you invest in.
If the return is 3 per cent a year, after fees and taxes, your total will be about $12,400. If the return is 8 per cent, your total will be about $14,000.
Those are pretty amazing totals, given that your contributions are only $5,200, drip fed into the account.
To do equally well — if the government wasn’t helping out — you would need a return of more than 36 per cent a year to get to $12,400, and almost 42 per cent to get to $14,000.
Returns like that come only if you take massive risks. But with KiwiSaver, you can achieve the same with little risk. That’s why everyone should sign up — although people in KiwiSaver for more than five years won’t get quite such good effective returns.
Note the two returns I used, 3 per cent and 8 per cent.
You will need to decide what sort of fund to invest in. Generally, the rule is to put money you expect to spend in just a few years into something conservative, like a bond fund. In a share or property fund, there’s too big a chance that you will strike a market slump when you are taking money out.
On a bond fund, your return might average around 3 per cent after fees and tax.
However, here’s another perspective: If putting $1040 a year into KiwiSaver is chicken feed compared with your other savings, go into riskier investments to give the money a chance to grow to something worthwhile. If you have bad luck and it bombs, you have enough other savings.
If that sounds like you, you might invest in a fund with expected returns averaging 8 per cent a year, after fees and tax.
Note, though, that there isn’t a huge difference between $12,400 and $14,000.
That’s because the money is being drip fed in over time. If the full $11,400 were in the account at the start, there would be much more money working over the years, and a much bigger difference in the two final totals.
In light of this, you might be happy to settle for a more conservative fund.
Other non-employed or self-employed readers may be thinking that, with effective returns of up to around 40 per cent, they will put a lot more into KiwiSaver than $20 a week. But it doesn’t work that way.
If you contribute more than $20 a week, you get no more from the government. Returns on that extra money will just be whatever the scheme offers — in our examples, 3 or 8 per cent. You might as well save elsewhere, and avoid tying up your money.
For employees, the situation is different. Once employer contributions are in full swing, from April 2011, your effective returns will be even higher on the 4 per cent of pay that you must contribute.
Again, though, there is no advantage in investing more than the 4 per cent, versus saving it elsewhere.
That’s too bad that you’ve had trouble getting through to Inland Revenue. The department says waiting times are short at their KiwiSaver Call Centre, which is open Monday to Friday 8 a.m. to 8 p.m. and Saturday 9 a.m. to 1 p.m.
Individuals should ring 0800 KiwiSaver (0800 5494 7283), and employers should ring 0800 377 772. Language Line service can be requested offering 39 languages. The hearing-impaired can fax 0800 447 755.
P.S. It’s a pity you’re not American. With a July 4 birthday, you would have had a holiday on your birthday every year!
QThanks for publishing my letter last week — even though it contained some personal comment about my perception of your bias towards shares!
In response to your answer last week: Our sharemarket can be overheated even though below that of 1987 because in 1987 it was incredibly ridiculously overheated!
In an attempt to fudge the issue, our stock exchange a couple of years ago switched to an index which includes dividends, unlike the old SE40 and most other major indexes around the world which still don’t include dividends.
I am “one of those who thinks dividends shouldn’t be included”, and so perhaps are some writers in the Herald this year who have also commented that our market is still below that of 1987.
You are right — dividends are like rental income. But rental income doesn’t get included in average house price statistics to artificially inflate them, does it!
What about doing a quick analysis of housing and shares (including rentals and dividends) since the 1987 peak and tell us which one comes out on top?
AI would if I could. There have been many attempts to make the comparison. Trouble is we’re comparing not apples with oranges, but apples with elephants.
Housing nearly always involves borrowing, whereas shares normally don’t. And there are many other variables.
What do you look at? Gearing of 50 per cent or 90 per cent? And what proportion of the house price do we make the rent? What mortgage interest rate, and fixed or floating? What vacancy rate? How much is spent on maintenance, rates and insurance? What about commissions and other expenses of buying and selling? All of these can vary hugely.
There isn’t any good data on some of this. Even if there were, and we used national averages, every landlord would say, “But that’s nothing like my place.”
I think you’re getting a bit carried away about sharemarket overheating. If you look at different countries’ share market performances since 1980, ours is now well back in line with others, and in fact below many.
On whether dividends should be included in share indexes, it’s true that the most quoted indexes around the world exclude dividends, but that’s just because that’s the way it’s always been. It’s not good. All unbiased researchers with any nous use “gross” indexes, which include dividends, when doing analysis.
To explain why, let’s look at Big Divi Co, which distributes most of its profits as dividends, and Tiny Divi Co, which makes the same profits but keeps most of the money to grow the company.
Everything else being equal, Tiny will grow faster because of its higher funding, so its share price will rise faster.
Shareholders in the two companies are equally well off. What Tiny shareholders lose on the dividends they gain on the price when they sell their shares.
In New Zealand, we have more Big Divi Companies, relative to other countries. So our share price gains tend to be smaller. If we use a “capital index”, which doesn’t include dividends, then, that makes our market performance look a lot worse than it really is.
Other countries, with their lower dividend payouts, don’t look so bad in indexes that exclude dividends.
The only way to make a fair comparison is to use gross indexes for all countries.
In your letter, you named two Herald writers who, according to you, say our market is still below 1987. They’ve asked not enter this fray, but both say there should at least be some allowance for dividends when assessing a share market’s performance.
One raised the point that many shareholders don’t reinvest their dividends, but spend them. But I don’t think that’s relevant.
Firstly, many people invest in shares via share funds, and in most cases they do reinvest their dividends — along with many direct shareholders.
Secondly, those who choose to spend the money instead presumably do so because either:
- They need the money for living expenses. But does it make sense to reduce the return an investment offers because some people aren’t in a position to make the most of it?
- They prefer to have the money now, which implies that they get even more value out of the dividends than if they reinvested them. Maybe we should actually add to the gross indexes to allow for that!
Finally, some comments about whether rental income should be included in house price stats:
- Nobody uses house price stats to measure the full return on rental property. That’s not what they are there for.
- If we did include rents, it would be logical to include expenses too. These days, expenses usually exceed rent, so we would be adding a negative number to the house price stats. With shares, on the other hand, there are hardly any ongoing expenses if you buy and hold.
- House price statistics are not adjusted for the marked increase in the size of houses, nor the increase in the general quality of homes — leaky homes notwithstanding.
Perhaps we just have to settle for the fact that it’s impossible to directly compare property and share investments.
Over the years, most people have done well in property or shares, and some have done badly in property or shares. To each his own.
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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.