NZ Herald 7 June 2014

ATough times for your family. But thanks goodness you’ve got the KiwiSaver money — assuming you’re allowed to withdraw it. Having an emergency fund is one of the less frequently mentioned advantages of KiwiSaver — although everyone should note that you can’t withdraw money unless you’re in a seriously bad way. It’s a safety net for the big falls only.

The best way to use your money is to repay the highest-interest debt in full first, then the second-highest in full, and so on. Keeping the money in a bank account that pays just a few per cent after tax while you’re paying out maybe 15 or 20 per cent on your debt will take you backwards.

I suggest, though, that in the short term you set aside in a bank account what you’ll need for living expenses until your partner finds new work.

And allow for that to take a few months, just in case. Once he has a new income, you can get straight into knocking off those horrid debts — and keep at them until they’re all zero.

From then on, please don’t run up more debt than you can repay in full every time the card bills come in — even if you’re both earning heaps. If you save for items before buying, you make interest your friend rather than your enemy. You’ll end up able to buy a lot more in your lifetimes, and you’ll avoid the stress and worry you face now.

AI suggest you put the kitchen on hold until after you’ve rented out the property — or decided not to do that. A new kitchen is not essential and it clutters up your decision-making.

Then use most of your savings to pay off the mortgage — keeping a little aside for emergencies.

Why? Just as in the Q&A above, unless your savings are earning a higher after-tax return than the interest you’re paying on your mortgage — which won’t be the case unless you’re in a pretty risky investment — you’ll get more mileage from your money by getting rid of the mortgage as soon as possible.

AThe person who made the comment is partly right but mostly wrong.

It’s correct that you don’t need to mention KiwiSaver on your tax return. And for the many people who don’t have to file a tax return, the fact that they’re in KiwiSaver doesn’t change that.

But she or he is wrong to imply that KiwiSaver returns are tax-exempt.

When you join KiwiSaver, your provider helps you work out what tax rate applies to you — taking into account your other income. The provider then takes tax out of your KiwiSaver returns and sends it directly to Inland Revenue.

In your provider’s regular reports to you, they should include how much tax you’ve paid — just for your info. They should also regularly check that your tax rate — called your PIR — is still correct.

Because KiwiSaver funds are PIEs (portfolio investment entities), the tax is usually lower than on other income. But — even though you don’t have to worry about tax on KiwiSaver — it’s certainly paid.

AFirstly, have you been in KiwiSaver for at least five years? If not, you will continue to receive tax credits until the fifth anniversary of your joining, and you can’t withdraw your money until then.

But assuming you have been in the scheme for more than five years, you’ll get a tax credit for the KiwiSaver year starting July 1 2014, but it will be smaller — proportionate to how much of the July-June year you are under 65.

Let’s say you turn 65 on December 15. Add up the number of days from July 1 to the day before your birthday. That comes to 167. So your maximum tax credit will be 167/365 of the standard $521 maximum, which is $238.38.

As usual, you have to contribute at least $1 for every 50c of tax credit. So you’ll need to contribute at least $476.75. But you don’t have to deposit all of that before your birthday, says Inland Revenue. It can be contributed any time up until June 30 next year.

One more point: I suggest you don’t withdraw all your money, as that will automatically close your account and you can’t reopen it after 65. If you leave a small amount in there, that keeps your options open for the future.

For the benefit of others, similar calculations are made if — during a July-June KiwiSaver year — you:

• Turn 18, the age at which the tax credit starts.
• Join KiwiSaver, and are older than 18.
• Reach the fifth anniversary of joining KiwiSaver after your 65th birthday.

In all these situations, your maximum tax credit at the end of that KiwiSaver year is proportionate to how much of the year you were eligible for the credit. And in all cases, your contributions in the whole of the July-June year are counted.

AYour question is largely answered above. You’ll get a small tax credit, for last July and part of August. You should receive it around August or September this year.

But I’m more interested in your other comments. It sounds as if you thought, when choosing your risk level, that you might as well take some risk with the government’s tax credit, which you wouldn’t have received if you weren’t in KiwiSaver. That’s good thinking for people able to stomach bad years — which you’ve proven you can do.

Now’s the time, though, to think about when you expect to spend the money. If it’s within the next few years, you might want to move to a lower-risk fund to avoid the chance of your balance slumping right before you want to withdraw it.

AYes, it is age discrimination. But so is paying NZ Super only to people 65 and over. It’s a pretty good trade-off!

On your second question, I would keep contributing for as long as your employer is willing to contribute. It’s like free money, and the fact that you’re no longer getting tax credits means you can withdraw your and your employer’s contributions whenever you want to.

Once you stop work, it will probably be a toss up as to whether a cash KiwiSaver fund gives higher returns than bank term deposits. In some periods one will; in some the other will.