Also: Seeking your questions about KiwiSaver
Seeking your questions about KiwiSaver
The government’s retirement savings scheme, KiwiSaver, comes into effect on July 1. Practically everyone who starts a new job will be automatically enrolled in the scheme, although they can opt out after two to eight weeks if they wish. Every other New Zealand resident aged 18 to 65 will also be eligible to sign up.
In the lead-up to KiwiSaver, the Herald plans to run some special sections to help readers make key decisions about their involvement in the scheme.
The sections will include readers’ questions, with answers from Mary Holm. Please submit your questions for consideration (maximum 200 words) by March 7 2007, to [email protected].
Some basic facts about KiwiSaver:
- Participants will contribute either 4 per cent or 8 per cent of their income. A key attraction will be a kick start from the government of $1,000 for everyone who remains enrolled for at least a year. After a year’s enrolment, you can take contribution holidays, or continue to contribute.
- Your money will be invested in a private sector provider’s savings fund. You can choose the fund or let the government allocate you to a fund. The government will subsidise investment fees.
- Generally, your money will be tied up until you turn 65, but there are exceptions: You can withdraw money if you suffer hardship or serious illness, if you emigrate permanently, or if you are buying a first home and are eligible (the eligibility rules are yet to be announced). The government will also contribute to towards the purchase of your first home — $3,000 if you have been in KiwiSaver for three years, ranging up to $5,000 if you have been in for five years. (A couple can get up to $10.000). If you die, the money goes to your estate.
- Some employers may boost their employees’ contributions to KiwiSaver, and if they do that, no tax will be payable on the employer contributions.
QI am a woman alone in my mid fifties now and have $40,000 invested in my savings account in a bank.
I rent a little studio apartment, as I still cannot afford to buy a property. The place I rent is $240 a week, which includes my rent, power and water, which is very good considering the area.
However, this does not stop me worrying about my future, and I am now becoming very concerned about this money in the bank. Mary, I do not know what to do.
So I decided to write to you for some advice and opinions of your own. That would be wonderful.
Listed below are some of my thoughts:
- Try and buy an apartment in the city. Realistically I would only be able to afford $150,000. I have a full-time job earning just over $500 a week.
- Invest my money with somebody like the Fisher Funds for the long haul.
- I have a friend with similar money. She suggested we could buy, do up and sell properties.
- Buy a place cheap down the line. I love Waihi. Rent it out, near the township.
- I have a great son who is 26. He said he might be able to help me if I knew what I want to do. (I don’t know.)
- I’m going to get your book today, “Get Rich Slow”. That’s a good start, Mary.
Looking forward to your comments.
PS I am also feeling very insecure and sad, because I do not have the security and certainty of owning my own place.
AYour postscript is perhaps the most important part of your letter. One way or another, let’s get you into a place of your own.
Of your suggestions, I like the first one the best — apart from buying my book, which of course I also like! All marketing aside, the book should be pretty helpful to you.
Let’s say you buy a $150,000 apartment, with $40,000 down and a mortgage fixed for five years at 8 per cent.
It would be best to pay off the loan by the time you retire. This will be a stretch on your current pay. If you want to repay the loan in 12 years, you’ll have to pay about $1190 a month.
Over 15 years it will be about $1050 a month — not a lot more than your current rent, but you would have to cover power and water as well.
Maybe you could start out with a 20-year loan, paying $920 a month, and then feed in any extra money over the years with the goal of reducing the repayment time.
If you buy, there’s always the danger the mortgage interest rate will rise. But I reckon you would handle that somehow. It sounds to me as if you’re pretty motivated.
Some comments on your other ideas:
- You could indeed go into one of the Fisher Funds, which invest in New Zealand shares and have recorded impressive returns in recent years.
Still, that’s been in a period when most NZ shares have performed well. If the market should stagnate or fall for a while, the fund might very well fall with it, or even perform worse than the market.
You probably have more than ten years in hand before you retire. And it’s pretty unlikely such an investment would lose value over a period that long. But could you cope with volatility in the meantime, especially when we’re really talking about your only chance to get into the housing market?
A relatively risky investment like that — or any investment in shares or a share fund — doesn’t feel right for you.
- It sounds as if your friend has heard about others buying “do-ups” and selling them for big profits. If you two are good at doing such work yourselves, and would enjoy it, that is a possibility. But you might well be better off putting that time into a second, part-time, job.
And if you hire others to do the work, that would eat into your profits.
In any case, I worry about how big the profits would be. In rising house price markets, as we’ve seen recently, such plans can work really well. But I don’t know anyone outside the real estate industry who feels confident that large price rises will continue.
Don’t forget, too, that Inland Revenue might well be interested in taxing your profits. Again, it’s all rather risky in your situation.
- Buying a rental property outside Auckland might work, particularly if you would like to live in the house when you retire. But if you would rather stay in Auckland after retirement, there’s quite a risk that city property values will grow faster than wherever the rental is.
Also, you might have trouble finding good long-term tenants. And it’s not easy running rental property from afar. You would probably have to hire a property manager, making it pretty unlikely the net rental income would cover all expenses.
In summary, many of your ideas, while imaginative, are probably too risky for you.
To make the apartment buying option work better, how about buying a place with your friend? If you want privacy, maybe you could get a property that includes two flats.
Alternatively, take in a boarder to help pay your mortgage.
Or your son might pay off part of the mortgage, perhaps in exchange for your leaving the property to him in your will.
Whatever you decide, good luck.
QThe IRD’s response to one of your reader’s questions in the Herald recently was very useful and helped me to understand the new legislation better. I just have one further question specific to my unfortunate predicament.
I am in the position of having invested in a tech stock in Canada in 2002, at a cost of slightly over NZ$60,000, as opposed to today’s value of the stock of around NZ$16,000.
As the original investment is over the $50,000 threshold, will I be hit again with this new tax or can I have the shares revalued at their market value on 1 April 2007 — which presumably will be well under the threshold unless there is a miracle between now and 1 April — and then be outside the new tax regime?
AThe $50,000 threshold is based on the original cost of offshore shares.
“This is so taxpayers can refer to the fixed actual cost when determining whether the threshold applies to them, rather than having to track changing market values over time,” says Peter Frawley of Inland Revenue.
Unfortunately, in your case that means that your shares don’t qualify for the threshold.
There’s some compensation, though. As Frawley points out, when you calculate the tax, it will be based on the current market value.
QFrom reading the answers you got from Peter Frawley, I understand that the $50,000 threshold operates on the original cost of purchasing the shares.
We worked in Ireland for a number of years and received some shares as part of employee incentive schemes etc, ie. at no cost to us.
For the purposes of calculating the cost of these shares, would they be valued at zero (what we paid) or the market price of the shares?
ASome not-so-good news from Frawley: “The person in this example is treated, for the purposes of the $50,000 threshold, as having acquired the shares for their market value at the time they received the shares under their employee incentive scheme.”
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.