Q&As
- Should student earn interest while running up student loan?
- Freebies for shareholders left some the worse for wear
- Deduction of Canadian pension from NZ Super seems fair
- Another ethical KiwiSaver fund
- Show Me The Money Week about to start
QI am 24 years old, currently studying my second degree, and have only just begun to take a grip on my personal finances in the last six or so months. I have made sure that I have fully funded my KiwiSaver to get the member tax credit, work part-time, receive the Adult Student Allowance, and by the time I graduate (end of 2018), I should have around $35,000 in student loan debt.
I save around $400 a month into a 3 per cent interest account, with occasional bonuses from scholarships. At present, I have about $5000 in there.
I am wondering if having this lump sum in a savings account is the best use of my money. The career I hope to pursue is likely to take me overseas, but I am having second thoughts about holding that money in a benign saving account as opposed to investing it.
Ideally I would not want to pay any student loan interest to IRD, thus the current plan of building a giant lump sum that can be used to write off the loan upon graduation.
I am highly enamoured with investing in exchange traded funds, and the thought of an early retirement certainly appeals. However, NZ has a rather unique system, especially with interest-free student loans — if you’re living here.
There isn’t really a wealth of information on this subject, and I was wondering what your opinion was? Should I bite the bullet and start investing — or should I remain a bit more passive and risk-averse?
AThere are a couple of issues here. One is your best move financially. The other is the “system”.
Opponents of the interest-free feature of student loans will point to the fact that you are saving $400 a month, plus scholarship money, while running up your debt.
Clearly you don’t need to borrow as much as you are borrowing. And the interest you earn on your savings — enabled by your borrowing — is really a gift from the taxpayers of New Zealand, whose government offers you an interest-free loan.
Ten years or so ago I criticized students in this column who took advantage of this situation. But then I stopped the criticism. The system more or less invites you to do it, quite legally. And many others do it. It’s the rules that should be changed, rather than your behaviour.
That’s not to say a rule change is simple. Many people — including me — like to see students who otherwise couldn’t study able to do so because they can borrow interest-free. The government needs to somehow separate students in need from the others.
Anyway, that’s not your problem. You’re working within the rules. And you’re obviously savvy not just in this respect. For example, you’re evidently contributing at least $1043 a year to KiwiSaver so you get the maximum tax credit — something other students should also try to do. Note to parents of students: It’s great if you can help with this.
So what should you do with your savings? Given that you might move overseas fairly soon — and would then have to pay interest on your student loan, currently at 4.8 per cent — I suggest you concentrate now on building up your savings account balance. Hopefully you’ll be able to pay the loan off in full just before heading overseas. If not, the more you can pay off the better.
Note that I said “just before” leaving New Zealand. You mentioned repaying the loan on graduation. But the loan is interest-free as long as you live in this country, so you might as well keep the money compounding in the meantime.
Why not save in an exchange traded fund (ETF), which is a type of low-fee share fund? After all, over the long term we expect such an investment to grow faster than a bank account. The trouble is that your balance in any share fund will sometimes decrease. If you’re expecting to move offshore any time in the next eight to ten years, there’s too big a chance that share markets will fall at the wrong time.
However, once you’ve got enough set aside to fully repay your student loan, by all means save for that early retirement in an ETF.
By the way, you might want to look into moving your savings every now and then into a bank term deposit if you can earn more interest there. Check on www.interest.co.nz for rates. Just make sure all your deposits will mature before you’re likely to head overseas.
QI was amused by the retiree last week who has quite a diversified investment in shares and enjoys attending the shareholder meetings and afternoon teas.
Back in the late 70’s and early 80’s when I worked for a brewery in Wellington we used to have the AGMs at the Hotel St George, along with the company’s fine products being served with afternoon teas. A lot of the shareholders drank too much and had to be lined up along the wall outside the hotel to sober up! How times have changed — probably for the better!
AWell yes, especially if the shareholders were then driving home.
It makes you wonder about the role of freebies in investment decisions. I hate to think of people being swayed — in your company’s case perhaps literally — by handouts.
Reminds me of a friend who invested in Turoa Skifield years ago. The investment turned out to be lousy, but when I went skiing with him we got a great parking space right by the chairlifts. It was some compensation at least.
QRe the query in your last column regarding “overseas pensions”, just a word of warning to this person and others.
I’m a fourth generation Kiwi that has worked for close to 30 years in New Zealand and also 23 years in Canada, during which time I diligently contributed from my wages into a privately administered pension fund.
When I returned to New Zealand and become eligible for the NZ Super I found out to my utter annoyance and extreme anger that my hard earned Canadian retirement savings annuity payments were going to be deducted from my NZ Super.
While I can accept deduction of a non-contributory overseas pension, I cannot accept that the law here has been conveniently manipulated so that any contributory overseas retirement savings can be deducted as well.
The fund was established by the Canadian Federal Government. However, it is not a government-funded retirement plan (unlike NZ Super) and has no administration or management or any involvement by the Canadian government.
The fund’s distribution and investments are administered by a non-governmental privately run board of directors and executives who act entirely independently in the best interests of the fund’s contributors (ie.employers and employees) and beneficiaries, such as myself.
Canada does have a Government pension plan identical to NZ’s Super, known as the OAS, which is paid to every Canadian once they reach 65.
So be very cautious on how and where and under what scheme you contribute your retirement savings.
AYou’re not the first person to complain about this. So I sent your letter to the Ministry of Social Development (MSD).
“Your reader is likely to be referring to the Canada Pension Plan (CPP), which was established by the Canadian federal government,” says a spokesman.
“CPP is a compulsory scheme and contributions are required to be paid by employers and employees. (Self-employed Canadians pay the full amount.) Voluntary contributions cannot be made to the CPP.”
It seems the compulsion makes a difference. You didn’t have any choice about contributing to the CPP.
“CPP pensions are subject to direct deduction as they meet the criteria in section 70 of the Social Security Act 1964,” says the spokesman.
“That is, the pension forms part of an overseas programme that provides pensions, benefits and periodical allowances for some of the contingencies for which New Zealand benefits and pensions would be paid, and it is administered by or on behalf of the Government of the country making the payments.”
Clearly the MSD regards the CPP as being administered on behalf of the Canadian government, despite what you’ve said.
The spokesman continues, “The CPP was the subject of the 2002 High Court case Hogan v the Chief Executive of Work and Income New Zealand. In that case the court ruled that the Ministry was required to deduct the CPP from New Zealand Superannuation.
“In particular, the High Court commented: ‘…it is not necessary in terms of section 70 to conduct an inquiry as to how the relevant Government collects the funds and particularly whether they are from taxation or another type of compulsory acquisition from a person’s income which the Government chooses not to call taxation.’
In my words, there’s not really any difference between taking the money from your pay as taxes or compulsory pension contributions.
The spokesman goes on to say, “Canadians are able to voluntarily supplement their government-administered pensions through Registered Retirement Savings Plans (RRSPs).
“RRSP pensions are the Canadian equivalent to KiwiSaver and are not deductible (from NZ Super) as they are administered by private providers rather than by or on behalf of the Canadian Government.”
There’s obviously room for debate here. No two countries super schemes are directly comparable.
But I can see MSD’s argument. Only a government can make a pension scheme compulsory. Would it be fair for you, who spent 23 years working in Canada, to end up with more from what seems to be basically a government pension than someone who worked their whole life here?
Nevertheless, I feel for you if you didn’t expect the deduction from your NZ Super. That must have been a nasty shock. Every reader who knows Kiwis working in other countries might want to send them this Q&A, so they know about this issue.
For more info on deductions from NZ Super, see tinyurl.com/pensionNZ. And for more on the CPP see tinyurl.com/pensionCANADA — which, by the way, is a website run by the Canadian government.
QI just thought I’d send you a quick note to let you know that AMP also offers a responsible investment fund — it’s called the AMP Responsible Investment Balanced Fund.
AFor some reason that fund wasn’t included in the KiwiSaver Fund Finder on www.sorted.org.nz when I looked there last week for ethical funds and similar. But we can add it to the funds I listed in last week’s column.
MONEY WEEK
This year the Commission for Financial Capability’s Money Week is called Show Me The Money Week. It starts this coming Monday and runs through to next Saturday.
“It’s all about visualising the future — especially the cost of 30 years of life in retirement,” says the Commission. “Collectively we’ll be encouraging New Zealanders to see their future and make a plan to get there — whether it’s saving for a house deposit, going on a family holiday, or planning for the retirement they see for themselves.”
For information on what’s on around the country — including more than 50 public events, resources and so on — see www.moneyweek.org.nz.
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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.