NZ Herald 6 August 2016

AIt’s not obvious. So let’s weigh up the risks and returns of each option.

We’ll look first at keeping the rental until you retire.

If the Auckland housing market grows fast over the next 20 or so years, you’ll be glad you kept it. And the growth wouldn’t have to be continuous. You have enough time for the market to fall and rise again, perhaps more than once.

But while it would be surprising if property values don’t grow at all over such a long time, they might not grow much. Sure Auckland’s population is expected to keep rising. But population growth may already be reflected in house prices — plus who knows how much bubble? And Auckland’s housing shortage must surely be solved within 20 years.

So your return — including rent minus expenses over the years — will probably be positive, and it might be high, but it might not.

What about the other scenario: selling the rental and paying down your mortgage?

The immediate return is known. Getting out of paying interest improves your wealth in the same way as earning interest. So if your mortgage interest rate is 6 per cent, no longer having to pay that is the equivalent of earning 6 per cent on an investment — after all fees and tax. It’s a great risk-free return.

But wait, there’s more. Once you’ve fully paid off your mortgage, what will you do with the money that used to go into mortgage payments?

I would suggest putting it into KiwiSaver. If you have more than ten years before you plan to spend the money in retirement, you could invest in a higher risk fund, which will probably bring in higher long-term returns. Then, as you approach retirement, you can move the money you expect to spend within ten years into a lower risk fund.

The big question is: will you end up at retirement with more in the first or second option? Nobody knows.

One clear advantage of the second option is that you can dial down the risk over the years. You can’t do that with a property. There’s no way of knowing now whether the property market will be roaring or collapsing when it’s time to sell.

Largely because of that, I’d go for selling the rental now. Even if Auckland house prices continue to rise fast for a while yet, you’ve already made great gains in the last few years — assuming you’ve owned the property for a while. Now is certainly not a terrible time to sell.

Also, there can be considerable hassles with tenants, maintenance and so on, especially given that you live out of town. By contrast, KiwiSaver is low-maintenance.

But please don’t come crying to me if it turns out that you’d have been better off keeping the property. That might happen.

By the way, if you decide to sell and pay down the mortgage, and the mortgage is fixed, you may face early repayment penalties. Check with your lender. If there are penalties it might be better to delay selling the rental until the end of the fixed term, or to hold the proceeds in term deposits until then.

AWhen KiwiSaver started, in 2007, employees had to put in 4 or 8 per cent of their pay. The minimum contribution has since dropped to 2 per cent and then risen to 3 per cent. So that’s where the 3, 4 and 8 come from.

Why not let people contribute something different? I suppose it’s to keep the admin simple. Or perhaps it’s just that nobody sees much need to change the rules.

That’s because you can make extra contributions of any amount — as lump sums or regular payments — directly to your KiwiSaver provider.

If you’re currently contributing 3 per cent, just set up an automatic transfer every payday from your bank account into your KiwiSaver account of another 2 per cent.

Your KiwiSaver provider should make this easy. If not, I’d be interested to hear about it.

PS You’re not bugging me! This column wouldn’t work without readers’ questions.

AI like “carefree” but I’m not so keen on “ever-spending”, so I suppose the modification is good!

Note that the KiwiSaver changes that take effect when you start to receive NZ Super — these days at age 65 — apply only if you’ve been in the scheme for at least five years. If not, your tax credits and employer contributions will continue until your fifth anniversary in KiwiSaver.

Assuming you do have at least five years under your belt, the answers to your questions are:

• You don’t have to do anything. You will have given your provider your birthdate when you joined, so they will take care of stopping your tax credit. You’ll get a partial credit in the year you turn 65.
• Employers don’t have to continue to contribute after you turn 65, but some generous employers do continue. Ask what the policy is at your work.
• After 65, you can leave all the money in KiwiSaver for as long as you like; withdraw some or all whenever you like; set up regular withdrawals; or do a combination of these. Ask your provider how to make withdrawals. It should be easy.

And don’t worry about tax. Your provider will have been paying the correct amount, on your behalf, over the years. There is no more tax to pay.

AIt’s not often that accountants get to be heroes, but I think you owe that one a drink! You might also raise a glass to the health board.

I’m publishing your letter not just because it’s a happy one, but also to point out to the young what a good idea it is to start retirement savings when you have many years for it to grow.

You’re lucky it was a private pension scheme. If you had contributed to a scheme run by an overseas government, the money you received would have reduced your NZ Super once you start to get it, at 65. In fact, if you also contributed to a UK government scheme, you might find that this affects you.

The idea behind that policy is that a person who has lived and worked in more than one country shouldn’t end up with more in government pension payments than someone who has always lived in New Zealand.

It’s controversial stuff, because each country’s scheme is a bit different. I’ve had plenty of letters about it in the past. But the basic idea seems fair to me.

AFair enough. I’m doing my bit by publishing your letter. I’m not sure August is the best time of year to be pushing Dunedin, though.

Meanwhile, there’s a tiny ray of sunshine for Auckland home seekers. Read on.