NZ Herald 6 December 2008

AGood on you for deciding when enough is enough. Your idea sounds wonderful — and feasible. And you might even extend your retirement by more than five years, by reducing stress.

I’ll answer each of your questions with a bullet:

• Some people will say you should allow for inflation. However, while medical spending might grow as you get older, other spending tends to decrease. I’ve heard retired people say that — as long as inflation doesn’t get out of hand — they can cope on the same amount year after year, even though inflation reduces how much it will buy.

  Beyond that, your arithmetic looks pretty good. Some couples may both be able to receive a NZ Super payment if one person qualifies and the other doesn’t, but only if the couple’s non-NZ Super income is less than a cutoff figure.

  Beyond that, your arithmetic looks pretty good. Some couples can both receive a NZ Super payment when one person qualifies and the other doesn’t, but only if the couple’s non-NZ Super income is less than a cutoff figure.

  The cutoff is currently $21,874 a year, but it generally rises yearly, so you might qualify by the time your wife is 65 — especially if interest rates plummet. Note, though, that if your non-Super income is near the cutoff the extra you’ll get as a couple wouldn’t amount to much. For more info, see www.workandincome.govt.nz or ring 0800 552 002.

• Only you can tell if $36,000 is enough for you. Research has shown — rather surprisingly — that many New Zealanders who currently get by on little more than NZ Super say they have sufficient money.

  But in any case I suggest you plan to spend more when you want to, gradually eating up at least part of your $600,000 in capital. Why shouldn’t you? If you have children or others you would like to leave money to, they can have the beach house.

  Go to the Retirement Commission’s www.sorted.org.nz, read their “Sorted 60plus” section and play around with their “Managing your nest egg” calculator.

  There are several scenarios there, including spending no capital and spending the lot. I suggest you also read the “Pete Brown and June Smith” case study on the website, which helps you understand how the numbers are adjusted for inflation and so on.

• Interest rates could indeed shrink, although promised tax cuts might counter that a bit. Over the long haul, though, who knows what interest or tax changes there will be? Also, inflation could speed up. And, for that matter, NZ Super could be reduced — although I doubt if by much for those already retired.

  Nonetheless, if you plan to eat up only part of your capital, you’ll have a buffer, and can spend more if you need to.

• The Sorted website tells us that a man of 60 can expect to live 21 more years, and a woman of 62 can expect 23 more years — although you can adjust those numbers.

  That means you’ll be expecting to spend some of your money more than a decade from now. I would therefore suggest you invest some in a share fund, despite the riskiness, because it’s highly likely to grow more than term deposits over ten years or more.

  Can’t cope with volatility? You could try a balanced fund, partly in shares and partly in less risky high-quality bonds. Or, if you must, a straight high-quality bond fund. It will be somewhat riskier than term deposits, and will usually give somewhat higher returns.

AFirstly, thank goodness you made it simpler. Even so, it’s still not a walk in the park.

You’ve outlined the tax position on imputation credits and term deposits correctly. So what happens when we introduce PIEs — or portfolio investment entities — into the mix? It all depends.

Firstly, let me repeat the features of PIEs run in this column a few weeks ago:

• The highest tax rate for any investor in a PIE is 30 per cent. This is helpful to people earning $40,000 to $70,000, who normally pay 33 per cent, and particularly good for those earning more than $70,000, who normally pay 39 per cent.
• Lower-income investors will in most cases be taxed at 19.5 per cent on their PIE income. This is of some help to those earning $14,000 to $40,000, who currently pay 21 per cent — although those earning less than $14,000 would be worse off in a PIE investment.
• What’s more if, in any of the two prior years, your non-PIE taxable income is below $38,000 a year, and your total taxable income including PIE income is below $60,000 a year, then all of your PIE income will be taxed at 19.5 per cent. It sounds a bit complicated, but think it through. If it would apply to you, it could mean big tax savings.
• A PIE that invests in New Zealand shares and/or in most large Australian listed shares won’t be taxed on capital gains on those shares, even if the shares are traded frequently. In the past, schemes that traded frequently did pay tax on that income. Managed funds that haven’t become PIEs still do — as do some direct investors in shares.
• If you don’t currently have to file a tax return, being in a PIE won’t change that. The PIE calculates the tax payable on the share of its income that it allocates to you. It then pays that to Inland Revenue without your bothering about it.
• As long as your PIE income doesn’t have to be declared on a tax return, it won’t affect entitlements such as Working for Families, child support, or repayments on student loans. This could make a big difference to some people.

Now to your question. I assume you are talking about direct investment in shares, and are considering investing some of the money in a cash PIE — which is similar in many ways to a term deposit. Would it be better than a term deposit in the situation outlined?

No. Pie income does not go onto your tax return, so you wouldn’t be able to use any excess imputation credits you have from your direct investments.

What’s more, if you invest in a term deposit and work out that you will be entitled to a refund of the tax withheld from your interest (the resident withholding tax) of more than $500 a year, you could apply for a certificate of exemption. This would reduce the tax withheld through the year, so you would get the benefit of the money sooner.

However, if you are a bit flexible, there’s a way you can achieve your goal using PIEs, and pay less tax in total.

To do this you would need to do your New Zealand share investing via a PIE that holds New Zealand shares, rather than investing directly. PIEs have their advantages, apart from tax. Generally, you can get much wider diversification, which reduces risk. And the fund managers keep track of dividends and other paper work for you.

Then there’s the tax. Most share PIEs can themselves use imputation credits, which will reduce the tax you pay on your PIE income.

Let’s look at an example from Inland Revenue. The PIE allocates to you, as an investor, $100 of dividend income, $10 of deductions and $33 of imputation credits.

The taxable income would be $90 ($100 minus $10) and the tax on that would be $17.55 (at the 19.5 per cent rate) or $27 (at the 30 per cent rate). The PIE would then subtract the $33 of imputation credits, giving you a refund of $15.45 or $6.

You would be credited with that refund, which would go into your PIE account, buying you more shares.

You wouldn’t need to file a tax return to do this. The PIE would take care of it all for you. And because you could take advantage of the generally lower tax rates in PIEs, your total tax would be lower.

Another advantage of this is that you could keep all your money in shares, if that is your wish — without having to put some in term deposits solely for tax reasons.