This article was published on 24 November 2007. Some information may be out of date.

Q&As

  • Eggs in baskets don’t really apply to term deposits, but there’s another way to diversify.
  • Taxing options if you take flatmates in to help you pay the mortgage.
  • 2 Q&As on how to make the most of KiwiSaver if you are in and out of the work force.

QDoes the “don’t put all your eggs in one basket” advice apply to terms deposits in the trading banks?

For example, life savings spread over ASB, BNZ, Kiwibank, National and Westpac instead of all in only one bank — say the National — which would be easier to handle?

ATheoretically it would be good to spread even bank deposits over many banks. But theorists don’t always take simplicity into account — even though it’s really important in our lives. In practice, I don’t think a spread is necessary.

The Reserve Bank, which keeps an eye on the financial strength of banks, recently said, “the financial system is sound and has been reasonably resilient against a backdrop of worldwide market volatility.” It’s hard to imagine a mainstream New Zealand bank getting into financial trouble in the near future.

If you were talking about finance company debentures, that would be a whole different story, with the recent failures at some finance companies.

True, some of the remaining companies are stronger. But I would never suggest you invest in finance company term deposits and the like unless you know lots about the companies and you spread your money over several different companies.

While I think banks are currently safe enough for you not to worry about diversification, there’s another type of risk to watch for. That’s the risk that you will tie up lots of your savings for a long time, only to see interest rates rise soon after, so you miss out on the higher return.

A way to avoid that is to stagger your maturity dates — a strategy sometimes called laddering. Try to set up your bank term deposits so that you have some of your money maturing in one year, some in two years, some in three years and so on.

That way you will get a fair spread across interest rates — sometimes doing poorly but also sometimes doing really well. It also means you will have money available reasonably frequently, in case you need it.

QI would counsel caution with your correspondent of two weeks ago who thinks that getting in flatmates will help out with the mortgage on her larger property.

That’s what I thought when I bought my first house. Unfortunately no-one wanted to live with the landlord.

In fact, this lady would not be getting flatmates, she would be getting boarders. If they don’t come you have to be able to cope with the outgoings on your own. I only just managed, but was living very lightly for a while.

She also has to be careful about how many boarders she gets as the IRD will get interested if the income from the boarders is over a certain level (can’t remember what it is).

AThere’s nothing like advice from those who have walked the walk. And I imagine it could be awkward if one of the flatmates in a house is also the landlord — although I know of situations in which it seems to work fine.

On the tax issue, Inland Revenue says you’re not necessarily right. Whether the relationship is one of landlord and tenants or homeowner and boarders depends on “the facts”. I suppose these might include things like whether the property owner routinely cooks meals for the others.

It seems likely that our correspondent would be in a landlord/tenant relationship. In that case — as with other rental property — she would have to declare the rental income and could claim related expenses.

However, if she decided it was a homeowner/boarder relationship, she could use what’s called the “standard cost determination” in working out her tax.

If she had one or two boarders who each paid $213 or less a week, she wouldn’t have to pay tax on that income. If she had three or four boarders, the cutoffs are as follows: the first two would each pay $213 or less and the other one or two would each pay $173 or less a week.

With five or more boarders, she would have to fill out a tax return and include all payments as income — although I doubt that would apply in this case.

If those cutoffs didn’t apply, she would need to use another option. She can get more information at www.ird.govt.nz by doing a search on “boarders”, or by ringing Inland Revenue’s automated stationery service on 0800 257 773 and asking for an IR 264 Rental Income booklet.

QA person joins a KiwiSaver scheme and after a period of time gets unemployed and has no employer contribution or his own contribution. What happens then?

And when a contributor dies before reaching 65, what happens to his fund?

AOn your first question, nothing happens, if that’s what he wants. The contributions just stop, and the KiwiSaver account sits there.

The only situation in which someone must contribute is during their first year in KiwiSaver if they are an employee. After a year, employees can take a contributions holiday. Everyone who is not an employee can simply stop contributing whenever they wish.

However, that’s not the way to get the most out of KiwiSaver. It’s best to make sure that in every year starting July 1 and ending the following June 30 you have contributed at least $1043.

That’s because, on every June 30, each KiwiSaver provider will send a list to Inland Revenue of its members’ total contributions in the July-June year. For everyone who has contributed less than $1043, the government will match their contribution dollar for dollar with the so-called tax credit. For everyone who has contributed $1043 or more, the government will put in $1043.

To make the most of the government’s gift, then, every KiwiSaver should try to get at least $1043 into their account by June 30.

In your scenario, someone who loses their job should find out how much they have put into KiwiSaver since the previous July 1.

If it’s already more than $1043, they don’t need to bother with more contributions until the following July-June year. But if it’s less than that amount, it would pay to build up their contribution by June 30 so it totals $1043.

Those who can’t be bothered doing that are missing out on having their savings doubled — which is a pretty good deal. For those who can’t afford to do it, it’s worth eating into their savings or adding to their mortgage if necessary.

Got all that? Let’s add a complication. In your first year in KiwiSaver, the maximum tax credit is proportionate to how much of the July-June year you have been contributing to KiwiSaver.

Inland Revenue regards you as having joined on the first of any month that you start contributing. So if you start in November — eight months before June 30 — you are eligible in that first year for a tax credit of eight-twelfths of $1043, which is about $696. If you start in January, you are eligible for a first-year tax credit of six-twelfths of $1043, which is about $522.

So, during your first year you should calculate your maximum tax credit based on the month in which you started contributing.

On your second much simpler question, when a KiwiSaver member dies at any age — before or after reaching NZ Super age — the money in their account goes into their estate and their beneficiaries can spend it straight away. They don’t have to wait until the KiwiSaver would have been 65.

QMy wife has taken on a part-time job for two months. She has joined KiwiSaver. After two months she will be unemployed until she decides to get some more temp work.

During the unemployment period I will be putting in $20 a week in her KiwiSaver. When she finds employment I will stop paying the $20 and let the employer contribute. Is this the way that KiwiSaver works?

AMore or less. But if you want to get the most out of KiwiSaver for the smallest contribution, it might be best to hold back on any contributions until next June.

At that stage, find out how much she has contributed from her current job and any future jobs, and also figure out her maximum first-year tax credit based on when she started contributing — as explained above.

If her total contributions aren’t as big as the maximum credit, you can always put in a lump sum during June to bring her up to the maximum.

After her first year in the scheme, you won’t have to calculate her maximum tax credit, as it will always be $1043.

From then on, every year during which your wife is sometimes working, the most efficient way to handle KiwiSaver will be to top up her contributions each June to $1043, if necessary.

One more thing: It sounds as if you may not realize that while your wife is working, she contributes 4 per cent of her pay. From next April, her employer will also contribute, starting at 1 per cent of pay — if current proposed legislation becomes law.

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.