Q&As

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Auckland Writers Festival

I will be appearing at the Auckland Writers Festival, at 2.30 to 3.30 pm on Saturday May 16, in a free panel discussion called “NZ’s economy: Where next?”. See here for more info.

Sex, drugs and rock ‘n’ roll funded by grandparents?

QWe would like to invest a lump sum for our new grandchild.

Can her parents open a KiwiSaver account for her? I gather the government top-up would not be available until she’s older. If yes, then is that the best place to put money for her long-term financial future?

We’re hoping to be around for many years yet, so she would not inherit anything from us for a while — always assuming that there is anything left after retirement, health and care costs for us!

ACongratulations on the new member of the whanau! And yes, her parents can open a KiwiSaver account for her with any provider. It should be quite straightforward.

You’re right about the government contributions. They and compulsory employer contributions won’t start until the girl is 16. (Employer contributions for 16 and 17-year-olds working full-time or part-time actually start this coming Wednesday, April 1.)

And note that a teenager won’t get the government money unless they or a family member or friend — nudge, nudge! — makes at least one deposit in each July-to-June year. For every dollar that goes in, up to $1,043 a year, the government gives 25 cents, up to $261 a year.

It’s a great way to support a young person. If you set up an automatic payment of $20 a week, from when they turn 16, that will get them the government’s maximum.

What about depositing the money elsewhere, perhaps in a non-KiwiSaver fund? The main advantage is that the young person can withdraw the money for any purpose, not just buying a first home or eventually in retirement.

They might decide to spend it on education, starting a business, travel — or squandering it on sex, drugs and rock ‘n’ roll! Nobody predicts such behaviour from their darling little new relative. But it does happen.

Perhaps that means the limitation on KiwiSaver withdrawals is a plus!

I also think it’s great to get the KiwiSaver ball rolling, lining up the child for the employer and government incentives later, and starting what will hopefully be a lifelong habit.

When the child gets to high school, you or their parents can encourage them to watch their balance grow, and learn what happens during market downturns. The new compulsory personal finance education in schools should help the young ones understand that.

Two more points:

  • Whether you choose a KiwiSaver or non-KiwiSaver fund, I suggest the money be invested in an aggressive or growth fund until about ten years before it’s likely to be spent. The balance will be volatile, but it will grow more over the years. As spending time approaches, reduce the risk.
  • I assume this little girl is your first grandchild. If not, I hope you plan to give the same amount to any of her siblings or cousins. So much family disharmony comes from unequal treatment.

And if there might be more grandkids coming along, I recommend allowing for the same gifts for them. Some people even make an allowance in a will for grandchildren born after they die.

Better to know

QI am a 78-year-old superannuitant who is a joint owner of land with my two sons and one’s partner in Auckland.

I have my own minor dwelling on the land, which I had built and paid for.

What happens if I require rest home care? I only have the pension as income. Would I be eligible for the residential care subsidy? Clearly to have to sell the property would seriously affect the other members of the family.

AAt first glance, most readers will probably think, “Having to sell the land does seem unfair.” But at second glance….

Let’s start with the basics.

Government funded old age care is only for the less wealthy.

“To qualify for a Residential Care Subsidy, a person must be eligible for publicly funded health and disability services, meet the age criteria and be financially eligible,” says Shannon Soughtton, Group GM Service Improvement and Delivery at MSD.

The “financially eligible” bit is decided by an assessment of your assets and income. “Property which is in joint ownership would be included in the means assessment of assets… if they are able to be realised by the person,” she says.

“Realised” means sold. And presumably your land could be sold — even though, as you say, it would disrupt the family. Perhaps you could sell just your portion. Or your sons could buy you out — maybe taking out a mortgage to do so — and your proceeds could pay for your care.

“Your reader would need to get in touch with Work and Income to share some more detail about their current assets before we could determine if there is eligibility to Residential Care Subsidy,” says Soughtton.

There’s more info on the Work and Income website. Or you can contact MSD’s Residential Subsidy Unit to discuss your situation. I suggest you do that. It’s better to know where you and your family stand. You can call them on 0800 999 727 or email to [email protected]

One family’s way

QYour previous correspondents about getting unneeded student loans seem to place the ethical burden on the parents rather than the child (new adult).

We found a simple strategy that empowered our children with their own financial decisions.

We are financially secure, and our goal was that our children could attend university, work part-time, and not graduate with crushing debt (i.e. what we did 30 years ago).

We decided to pay fees and a living allowance (based on the cheapest halls of residence fee), so about $25,000 per year.

Our children took out student loans at the start of the year to pay for fees and expenses etc. At the end of each year we reimbursed them, proportional to the number of papers passed (i.e. a failed paper cost about $4,000!). Both children failed one paper and never failed another.

Neither child worked for the first 1 or 2 years, however both worked in following years.

Both children chose to have the reimbursement drip-fed to them, and later began investing a portion into index funds.

Advantages: Our children learned financial responsibility — they decided whether to repay the student loan, invest the money or just spend it. Also, their financial decisions (e.g. halls of residence vs flatting plus ramen noodles) affected them, not us.

I think this strategy would also work for helping a kid through an apprenticeship (which is probably more useful than most university degrees these days).

ASounds as if it worked well. It’s great when you give young ones the chance to do well or not — up to them.

Some readers will object to your adult children using the money for investments while still owing the government. But enough! We’ve already had that “discussion” in this column.

Turning caravans

QThought I should tell you that you can buy relatively simple devices to turn caravans around these days, so you don’t have to back them.

We are campers (in tents), but enjoy watching what goes on in camping grounds. And these remote controlled gadgets are amazing and hilarious.

AMore revelations of my caravan ignorance. I’ll have to get out to campgrounds more often!

Selling to neighbour — sad

QI was interested in the letter regarding selling a house but remaining as a tenant. A friend of mine has accepted a similar offer, which is so massively advantageous to the purchaser that it is at least immoral.

My friend sold on a valuation by the purchaser which is at least $700,000 below the market value. He has the “right to live” in the house until his death, but the sale contract specifically denies him any tenant rights, but leaves him with all costs including repairs, rates and insurance.

Also, the contract is not tight enough to stop the purchaser from selling the house should he change his mind.

The purchaser is paying the sale price in annual instalments, which will take 40 years, although any balance is payable should my friend die before then. Because of inflation, the longer he lives, the more the house will increase in value, but all of the added value goes to the purchaser, while the value of the yearly instalments reduces.

The purchaser took advantage of my friend, who is financially naïve and very trusting and was depressed at the time. He had legal advice from a solicitor who was concerned about the valuation and coercion by the purchaser but, in his depression, he did not listen.

An equity release deal would have been far better for my friend. Financial and legal advice is essential, but people should involve trusted friends and relatives in important decisions.

I think there was an element of “grooming” by the purchaser (a near neighbour). I would love to see legal protection for vulnerable people who willingly sign away property or goods in a way that massively advantages the purchaser.

AA sad story, with several lessons for others. On the other hand, read on.

Selling to neighbour — happy

QHere’s an example of selling to the neighbours that worked wonderfully well for the seller.

I knew this elderly man who wanted to sell the house to his kids, but with the proviso he could stay in the house until he died. He was an old commie and all he wanted was a bit of cash for one last trip to Russia.

The kids thought this was ridiculous, as they would get the house one day anyway. So he sold to his neighbour. Trouble is he kept living and living until well into his nineties. But the neighbours were great, and when the value of the property went up, as it used to in the old days, they slung him some more money.

I think it is a great idea as long as it is tied up legally.

AThe kids sound rather mean — although we really need to know more before we judge.

But it seems it worked well for the man. I hope he enjoyed Russia.

What about us?

QLetter from Ralph Stewart, managing director of Lifetime Retirement Income:

Your analysis on the woman who sold her home to her neighbour and became a tenant did not include the Lifetime Home Reversion model. We think it is a sensible and practical option that deserves to sit alongside the others.

Using Lifetime Home as an example, the 78 year old single homeowner you described could:

  • Sell as much equity as she chooses over the next 15 years, up to 50%, to top up her fortnightly income after she stops working, without needing to manage a large capital lump sum, while her children can still plan her estate with confidence.
  • Retain a clear ownership power balance, with homeowner and provider never owning more than 50% each, and the actual share set with the homeowner’s best interests at the forefront.
  • Avoid having to sell 100% of the home to a neighbour, or commit 100% of its value to a reverse mortgage provider.
  • Remove uncertainty about a neighbour’s financial capacity or long term intentions, because Lifetime Home raises capital in advance and manages a diversified portfolio of residential property interests across New Zealand, allowing her to stay in her home for as long as she wishes regardless of the neighbour’s changing circumstances.
  • Retain flexibility, as she can cancel the agreement with Lifetime Home at any time (approval not to be unreasonably withheld) if her health or personal situation changes.
  • Rely, as you note in your article, on fair and independent valuations to determine the home’s value at each step.

In this scenario, we believe Lifetime Home would give this homeowner and her children a real alternative worth considering, alongside a reverse mortgage or a bespoke arrangement with her neighbour.

AThe reader did specifically ask about a reverse mortgage, but you’re right that home reversion is another option.

I didn’t actually have the space, last time, to go into any detail about either. Both concepts are not easily explained in a couple of paragraphs, which is why I often refer readers to economist Cameron Bagrie’s website equityrelease.co.nz for more info on both. Bagrie is on Lifetime’s investment committee, but the website seems to be unbiased.

No paywalls or ads — just generous people like you. All Kiwis deserve accurate, unbiased financial guidance. So let’s keep it free. Can you help? Every bit makes a difference.

Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a former director of the Financial Markets Authority, the Banking Ombudsman Scheme and Financial Services Complaints Ltd. 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]. 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.