This article was published on 6 August 2016. Some information may be out of date.

Q&As

  • Should couple sell Auckland rental now or keep it until retirement?
  • How to contribute something other than 3,4 or 8% to KiwiSaver
  • What happens when a KiwiSaver turns 65
  • ‘Good news’ letter a reminder to the young
  • Auckland too pricey? Try Dunedin
  • Update on KiwiSaver HomeStart grants

QWe live in the Bay of Plenty and have a little rental in Auckland. We are in our mid 40s.

We are now trying to decide if we should sell the rental, which will pay a good chunk of our own mortgage, and become freehold sooner, or hold it until we retire then sell to fund our retirement.

What would be the better option?

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.

QSorry to bug you. I’ve tried to find the answer to my question elsewhere but to no avail.

I want to know the reason why I can’t set my KiwiSaver contribution to 5 per cent of my pay? Why have they restricted it to 3, 4 or 8 per cent?

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.

QI am thankful for your efforts to give your readers a clear picture of KiwiSaver. It has beautifully modified my psychology of “ever spending carefree” nature.

Now that I am reaching to 65, I have three simple questions:

  • Do I have to inform IRD about my golden achievement, or do officials follow the record themselves and amend their deposit of tax credits of $521 automatically?
  • Does my employer continue to deposit their top-ups even after 65 years?
  • For withdrawal of the final amount, what is the procedure, and how do I settle my tax obligations with the provider Westpac?

I will be grateful for your advice.

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.

QYour comment last week regarding young people not wanting to think about retirement prompts me to share my ‘good-news’ story with you.

December last year was my 60th birthday. Amongst the cards from well-wishers I received a bowel cancer testing kit from the Waitemata Health Board, and a letter from UK asking for proof of my identity.

The latter was in connection with a private pension scheme I had paid into for about five years when I worked in UK in my twenties and which I had totally forgotten about (this was over 30 years ago!).

Thinking back, I do recall I had a mortgage at the time, and expressed doubt about contributing, but the company accountant, who I had a bit of a soft spot for, encouraged me to join.

I congratulated them on locating me, having since then emigrated to New Zealand and changed my name by marriage.

The result was a lump sum of about $30,000, and a monthly pension of about $500, which not only will I receive for the rest of my life (and I’m only 60 now) but, if I should die first, my husband will continue to receive it for the rest of his life. Yay!

By the way, the lump sum is tax-free in UK, but not in NZ, so I will have to pay tax on it here. Bit of a bummer, but as I wasn’t expecting the money it doesn’t really matter.

PS — the bowel cancer testing kit came back negative 🙂

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.

QFour hundred thousand dollars will get you a three-bedroom house on 1000 square metres in a city with a world-class university, top schools, and an international stadium (fully enclosed).

Kiwis need to stop complaining about Auckland prices and look around. Dunedin has all the jobs, shops and services that any other city has. Traffic is never a problem: drive to work in ten minutes.

Dunedin has a magnificent harbour, great beaches, outstanding natural beauty, an excellent cycleway network, and an abundance of golf courses. Sure, winter is cold, but it’s not very long.

The media would do Aucklanders a great service by making them aware of the alternatives available to them. Then, if they choose to pay the same price for a tiny apartment, it’s up to them, but they should be making more informed decisions.

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.

UPDATE

In last week’s column, in a Q&A about the KiwiSaver HomeStart grant, I said, “If you’re in Auckland, it’s not easy to find a house in a reasonable neighbourhood for less than the maximum $550,000. But prices could well fall, or that maximum rise.”

The latter happened, just one day later! Were they listening?

The government increased the price caps for the grant by $50,000 or, if you buy a new home, by $100,000. That brings the Auckland caps to $600,000 or $650,000.

The income caps also rose, from $80,000 to $85,000 for a single person and from $120,000 to $130,000 for a couple.

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.