NZ Herald 9 December 2023

AGood on you — firstly for getting rid of your mortgage and debt and saving a considerable amount in difficult circumstances, and secondly for making the career move.

Many people would shy away from accepting a cut in income, and taking on four years of study, at your stage in life. But you’ve thought it all through, including checking job prospects into your later years. And — most importantly — you will be doing something you love.

It sounds as if you’ve budgeted for getting by without using the $140,000. But it would be wise to keep a portion of that within easy reach in case you unexpectedly need it to replace a car or appliance, or for house maintenance and so on. The last thing you need while working full-time and studying is money worries.

Where should you put that money? At the moment, bank term deposit (TD) rates are a fair bit higher than savings accounts, and TDs for six months are considerably higher than for one month. To make the most of that, but still have $10,000 available every month, you could “ladder” say $60,000.

To set this up, put $10,000 into a one-month TD, $10,000 into a two-month TD, and so on, with the last $10,000 in a six-month TD.

When the first one matures, reinvest it for six months — so it will be available to spend again seven months from now.

When the second one matures, also reinvest it for six months — so it will be available again eight months from now.

From then on, reinvest every maturing TD for six months. You will always have $10,000 plus interest (after tax) maturing every month — plus another $10,000 a month later, and so on.

If you have to use any of this money, rather than reinvest it, top it up with the rest of your savings.

Meanwhile, what should you do with the remaining $80,000? If you want to be certain your balance won’t fall, put it in bank TDs too. You could ladder the whole lot as described above, or ladder the $80,000 over, say, one to five years to get the still higher interest rates over longer terms — although the money wouldn’t be as readily available.

Another option is a non-KiwiSaver fund. If you’re happy with your KiwiSaver provider, and they charge low fees, you could use one of their funds.

Nobody knows whether you will get a higher return in a fund than in TDs. If you choose a higher-risk growth fund or middle-risk balanced fund, your returns will probably beat TDs on average over the years, although almost certainly not every year. If you wouldn’t cope easily with volatile returns, go for a low-risk defensive fund, or a slightly riskier conservative fund — in which case you may or may not beat TD returns.

In all these funds the money takes just a few days to withdraw. But you have some ups and downs. Weigh this up against the certainty of returns on TDs, but less accessibility. Your call.

Footnotes:

• For info on which banks offer the highest interest rates, click on “Saving” on interest.co.nz. Don’t necessarily stick with your own bank.
• With all the hard work you’ve done, and will continue to do, don’t forget to treat yourself every now and then. Maybe keep several thousand dollars in a bank account labelled “fun”, for some meals out, shows, weekends away or whatever beckons you.

AYour money isn’t locked in. The bright line rule doesn’t prevent you from selling. But if you sell at a profit, that profit will be added to your other income and taxed at your rate.

While I think it’s fair for investors in property, shares or anything else to pay tax on their capital gains, let’s not go there again in this column at this stage. Last time we looked at that topic, the Q&As went on for months!

Suffice to say that — regardless of my view — I can understand your desire to avoid the tax.

I’m afraid there are no exemptions to the bright line rules for people in your circumstances. That’s probably because some people would be sure to tell a lot of fibs to qualify if there were.

However, as you may have heard, the new Coalition Government is expected to change the bright line rules, so they apply only to rental properties sold within two years of purchase. The change seems likely to take effect next July.

In any case, because you bought your property between March 2018 and March 2021, the bright line rules stop applying after you’ve owned the place for five years. And given you bought in 2019, that five years will be up in 2024. So one way or the other, some time next year you will be bright-line-free!

Still, understandably you don’t want to stay in your current situation for longer than necessary. The simple solution is to move to Auckland and rent in the meantime. The bonus: it will give you plenty of time to look around the Auckland market to see what sort of place you would like to buy.

AGood news — for the most part! Your son is not allowed to withdraw KiwiSaver money to buy a first home outside New Zealand. But as long as he has been living overseas somewhere other than Australia for at least a year, he can say he has permanently emigrated, close his KiwiSaver account, and use the money for a first home — or an extraordinarily expensive party or anything else.

I say it’s good “for the most part” as your son will have to kiss goodbye to government contributions he has received over the years. That money goes back to the government, says an Inland Revenue spokesperson.

But he gets to keep his own contributions, employer contributions, and the returns he’s earned all on the money — including returns on the government contributions. If he received the $1,000 kickstart and fee subsidies in the early days of KiwiSaver, he can keep those too.

For the benefit of others, if you move to Australia you can’t close your KiwiSaver account and access the money to spend, but you can transfer your KiwiSaver money to a superannuation account over there.

AGo with the UK pension, because of the employer contributions.

Anyone living overseas — including in Australia — can keep contributing to their KiwiSaver account. But they’re not eligible for government contributions and won’t get any employer contributions.

Unless fees are much lower in their KiwiSaver account, and for some reason their fund earns much higher returns than their UK pension fund, the account that gets a subsidy will always be better.

AThere’s no compelling reason for your daughter to move her savings from her New Zealand fund, which charges low fees. Nor should she necessarily stop contributing to it. That fund might well perform as well as UK options.

If she gets a job over there that comes with employer contributions to a pension scheme — like the young person in the previous Q&A — she should take advantage by joining and contributing to that.

But her KiwiSaver money could still stay where it is — available to be cashed in at some stage for a first home or some other purpose.

AA great question, especially from someone like you who makes significant contributions to your KiwiSaver account. Your fund could be suffering negative returns but your balance keeps growing.

What we need to establish is whether the 5.93 per cent is:

• A calculation you made on the change in your balance over the year, which will be distorted by your contributions.
• The return the fund manager reported to you. If so, the 5.93 per cent will be the return on investments — the work of the managers, as you put it — not counting your contributions.

A quick way to check on that is to use the Smart Investor tool on sorted.org.nz. The returns for your fund reported there don’t include contributions. Just make sure you’re comparing the same periods — although if they are slightly different periods that won’t usually affect the returns too much.

An interesting note: Soon after KiwiSaver started, in 2007, fund returns were hit hard by the global financial crisis. But back in those days most people’s KiwiSaver balances were still low. So regular contributions made a big difference to balances, to some extent masking the fact that a balance would have fallen a long way without the new money coming in.

On the other hand, by early 2020 when the Covid pandemic hit markets hard, most people’s KiwiSaver balances were much higher, so regular contributions didn’t have much of an offsetting effect. It seemed to me that more people panicked.

And from now on, as balances continue to grow, the offsetting effect of contributions on losses will be smaller and smaller.