NZ Herald 25 August 2018

AI don’t think you’re cynical. I think you’re making an interesting point.

And your maths is (are?) correct:

• If you earn $60,000, the tax on your employer’s contribution to KiwiSaver is $540. So the government gives you $521 in tax credits and receives $540 in tax from your employer.
• For someone on $40,000, the government would give $521 and receive just $210 in tax.
• But for someone on $100,000, the government would give $521 and receive $990 in tax. Not bad!

A key question, though, is whether employers have done what you suggest, and reduced people’s pay rises to take into account their employer contributions to KiwiSaver.

If they have, that means that without KiwiSaver employees would have received bigger pay rises, and that money would have also been taxed.

So the government could argue: “Why shouldn’t employer contributions be taxed, just because people get the money in KiwiSaver rather than in their pockets? We’re getting the same tax revenue we would have received without KiwiSaver, and we’re still giving out KiwiSaver tax credits.”

On the other hand, employers might actually be handing out more, in total, to employees than they would have if KiwiSaver didn’t exist.

Maybe they are accepting lower profits, which means shareholders are subsidizing KiwiSaver. Or maybe they’ve raised prices more than they otherwise would, which means customers are subsidizing KiwiSaver.

The truth is it’s probably a mixture, with some money for employer contributions coming from those sources, and some from smaller pay rises.

That would mean that the government gets somewhat more in tax revenue because KiwiSaver is there, but not as much as you say. For everyone except those on really high incomes, the government probably pays out more than it gets in.

Don’t forget, too, that Inland Revenue runs the KiwiSaver money flow from employers to providers. And the Financial Markets Authority regulates providers. And both of those, plus the Commission for Financial Capability, educate people about KiwiSaver.

You’re quite right that the government did well out of the halving of the tax credit and the introduction of tax on employer contributions. But the scheme still costs the government. Which, of course, is us in the end.

What it all really amounts to is that those not in KiwiSaver — or in but not contributing — are probably the biggest subsidizers.

P.S. The tax rate applied to employer contributions — called the employer superannuation contribution tax — is slightly different from the tax on employee income. But that complicates things too much and it doesn’t make all that much difference.

AIt also could have been so, so much worse.

Imagine if you were writing to say you had put the money into investment property, and the children’s inheritances had, in fact, halved.

True, property prices almost never drop that much. But let’s say you put the $200,000 as a deposit on a $600,000 property, with the rent covering mortgage payments and other expenses.

Then the property value dropped to a bit below $500,000, and the $400,000 mortgage hadn’t reduced much — they don’t in early years. Your children’s investment would be worth about $500,000 minus $400,000 which comes to $100,000 — or half the original inheritance. Gulp!

In that scenario, you could perhaps be called an idiot — and a reckless idiot to boot, given the money is not yours.

Nobody is good at forecasting investment markets, not even the so-called experts. Some people get it right sometimes, but often their “skill” is largely luck.

If you had asked me six years ago what to do with that money, when your children would have been 17 and 15, my first question would have been, “When do you expect they will spend it?” If there was a fairly good chance it would be within a few years, I would have suggested good old term deposits.

But if you had said the money would stay invested for six years or more, I would probably have said a low-fee balanced non-KiwiSaver fund — which holds about half bonds and cash and half shares and property. That’s as risky as I would go with someone else’s money.

As it turns out, you would have done quite a bit better in such a fund, because it’s been a great six years for shares too. But that wouldn’t always be the case. Again, nobody knows in advance.

Oh and by the way, I’m assuming you’ve suggested the kids don’t spend the money on uni expenses, because they can borrow for that interest-free. That was good advice. Nor should they use the money to pay down their student loans, unless they go overseas and have to pay interest on the loans.

The best use of the money is probably as a deposit on a home, as and when each of them wants to buy one. If that’s more than a few years away, you might consider moving the money to a balanced fund now.

Given your children’s ages, it would be good if they take part in the decision. You could explain that with a bit more risk they are likely to end up with more money, but that’s not guaranteed. They might want to do half and half, leaving some money safely where it is.

And no more beating yourself up about what might have been. You’re a responsible Dad who did nothing wrong.

AFirstly we need to clear up a bit of language. When you say “geared” I don’t think you’re using the financial meaning of gearing, which is borrowing to invest.

For example, you would usually gear, if you invest in property — hopefully benefitting from growth not only on your deposit but also the bank’s money.

But I think you just mean that a fund tends to invest a certain way.

I was also confused, on first reading your letter, about the idea that a growth fund would invest in many bonds, let alone cash. Growth funds invest largely in shares, which tend to grow faster than bonds and cash over the long-run, hence the name growth funds.

But I think what your adviser is referring to is the fact that the managers of some growth funds commit to investing largely in shares all the time, while others are more inclined to switch for a while from shares to bonds, and perhaps even the lower-risk cash, if they think share prices will fall soon.

This sounds great. The only problem — as I said above — is that while the managers sometimes get their timing right, they sometimes get it wrong. The share market roars upwards while they are sitting on the sidelines earning low returns in cash.

Lots of research shows that even professional fund managers often blow their timing, and that you’re better off in a fund that sticks with its investments for the most part.

In another respect, too, I wouldn’t rate the knowledge of your adviser very highly. International shares — or “equities” — have performed really well in recent years, way better than bank term deposits.

I suggest you look on the KiwiSaver Fund Finder on www.sorted.org.nz to find the best KiwiSaver fund for you. Work through “Find the right type of fund for you” first, and then compare all the funds of that type.

But don’t go with the ones that have high returns. Performance usually doesn’t continue. There’s a pretty good chance they will perform below average in the future. Look, instead, amongst the funds with the lowest fees. Fees don’t tend to change, and low fees give your fund a better chance or doing well after fees.

AGood point about non-stop banking, which I put to Westpac.

Here’s the bank’s response: “As noted in the letter, banks have worked hard to make transaction services more accessible than ever before.

“Further changes to standardise banking practices seven days a week are possible — this would require an industry-wide approach and support from regulators.

“In the case of a deposit, any interest accrued on a weekend or public holiday is applied on the next business day.”

Sounds as if we can keep hoping.