NZ Herald 30 June 2007

AThat’s great that your employer is generous enough to contribute 4 per cent from the start.

It will make a particularly big difference to people like you with just a few years in KiwiSaver to get the full 4 per cent four years earlier than the employer is obliged to do it.

And yes, you will receive both employer contributions and the government’s tax credit. The latter will match your contributions, up to $1,040 a year.

I can see what is confusing your friend, though. Once compulsory employer contributions start, in April 2008, the government will be reimbursing employers for their contributions, up to $1,040 per employee per year. That’s over and above the tax credit that will go into your KiwiSaver account.

Unfortunately for generous employers, that reimbursement won’t start earlier than next April even if their contributions do start earlier.

I should add here that the rules about employer contributions — unlike most of the rest of KiwiSaver — have not yet been passed into law. So it could all change.

On your second question, the news is not so good. To be eligible for KiwiSaver you have to be a New Zealand citizen or entitled to live in this country indefinitely, and be “personally present” in New Zealand.

The only ray of hope is that there’s an exception for State Service employees who live overseas. Would that apply, by any chance?

If not, provided the current scheme stays unchanged, your daughter will be able to sign up for KiwiSaver when she returns here.

In the meantime, once she has paid off her student loan, how about encouraging her to put the same amount as the loan repayments into a savings plan of some sort? She’s done without that money so far.

Sure, it’s not as good without the KiwiSaver incentives. But it could still provide the platform you want.

AThat depends on whether you are an employee. If not, it’s best to join KiwiSaver and contribute just $1040 a year, whilst continuing to pay off your mortgage as before — and using any spare money to pay it off faster than necessary.

But if you are an employee — and therefore have to contribute at least 4 per cent of your pay to KiwiSaver — and you earn more than $26,000, you can gain from mortgage diversion.

There are two situations that apply:

• You can’t afford to join KiwiSaver or you are reluctant to tie up 4 per cent of your pay — in most cases until NZ Super age.

Ask your mortgage lender if they will accept money diverted from your KiwiSaver account as part of your regular mortgage payments. If they won’t, you might want to move to a mortgage lender who will.

By using mortgage diversion, you are effectively putting less into KiwiSaver, as some of it comes straight out again to help pay a bill that you would otherwise have paid with other money.

If you earn $26,001 to $52,000, make sure that you leave $1040 of your own contributions in your KiwiSaver account each year, to make the most of the tax credit.

If you earn more than $52,000, simply divert half your contributions. You will automatically have at least $1040 left in KiwiSaver.

(This is where the $26,000 cut-off comes from. If you make less than that, your own contributions will total less than $1040. So any money you divert will miss out on the tax credit, which is too good to miss.)

• Putting 4 per cent of your pay into KiwiSaver is not a big issue for you, but you want to invest that money as efficiently as possible.

In this case, ask if your mortgage lender will accept diverted KiwiSaver money as extra mortgage repayments, over and above regular payments. If they won’t, consider switching.

The reasoning here is slightly long-winded, so bear with me.

You’ve probably heard me and others say that repaying your mortgage is an excellent way to “save”. If your interest rate is 9 per cent, paying back the loan improves your wealth as much as an investment that gives you a 9 per cent return — after fees and taxes. What’s more, it’s risk-free. It used to be almost impossible to do better than that.

Then along came KiwiSaver, which does enable you to effectively earn a much higher return on the money you put in — because of the kick-start, tax credits and, in many cases, employer contributions. True, KiwiSaver isn’t risk-free, but you can invest in a low-risk fund if you wish.

If you join KiwiSaver and then divert up to half your contributions towards your mortgage, you can get the best of both worlds.

As long as you leave $1,040 per year of your own contributions in KiwiSaver, so you get the full tax credit, you will still receive all the goodies that KiwiSaver offers. Beyond that, if you divert as much as possible into extra mortgage payments, you are doing probably the best thing you can do with that money.

Note, too, that this effectively frees up some of your KiwiSaver money. If you use it to repay your mortgage faster, you should be able to borrow back that money later if you need it for something else.

A few further points:

• Remember that mortgage diversion is available only after you have saved in KiwiSaver for at least a year.
• Not all KiwiSaver providers will go along with mortgage diversion. Pick a provider that will co-operate.
• It may take several weeks between the time you set up mortgage diversion and the time the first payment gets to your mortgage lender. So allow for that.

AThanks! And yes, for all of you who have contacted me because your spouse threw out those papers, or the goat ate them, the material is being published in a little red $9.99 book called “KiwiSaver: How to make it work for you.” It will be in bookstores and some supermarkets from July 13.

AGood point. You don’t usually hear landlords taking all those costs into account when they tell you how well they did with a rental investment.

I suspect that quite often, if a landlord had instead fed all that money into a share fund, she or he would have ended up with more — and with much less hassle.

However, I disagree that people should “rightly” ignore my warning, given the bubble-like state of the housing market, and the government’s noises about pushing prices down.

In the last house price dip — in the late 90s — some landlords were forced to sell at a loss. With people now borrowing up to 100 per cent to buy rentals, there could be more in the next dip.

Note to others: This reader was very PC and said “he/she”, “him/her” and “his/her” throughout his letter. But it slowed things down so much I changed it to just “he” etc, as the original correspondent was male.

But then I had to use “she or he” in my answer! Isn’t it about time we English speakers fixed this problem?