NZ Herald 9 November 2019

ASorry, but your family tree isn’t quite a scientific survey! It feels as if you think solo mums and divorced women are somehow spoiling the pretty picture of wedded bliss and shared money. And what about other single women? They are all there, and they all matter as much as the comfortably married.

At the start of retirement, men have, on average, 20 per cent more in savings than women. The reasons are obvious:

• Women often earn less, partly because they tend to work in lower-paying jobs, and partly because of prejudice.
• Women are more likely to take time out during their careers to care for children or other relatives. This means fewer years of saving, and perhaps reduced chances of promotion.
• Women tend to prefer lower-risk KiwiSaver funds and other investments. They will get a smoother ride, but their money will grow more slowly over the long term.

To some extent, it’s up to women to change some of this. But it would be great to see men doing their bit too. I like the attitude of the next correspondent, who is male.

AThe idea of paying less or no NZ Super to the wealthy has broad appeal, but:

• It would complicate a simple system that is praised around the world. Complications add to admin costs, meaning less money for everyone.
• The rich tend to find a way around means testing, using trusts and other tricks. It’s middle income people, who can’t afford high-powered advice, who end up worst off.

Under your proposed system, people would have to show they are in need. Some people would no doubt squirrel away money — perhaps to a child who quietly makes weekly payments to them. And if there’s scrutiny to prevent such ripoffs, those in genuine need might feel they are put through the ringer.

In any case, over 65s on higher incomes already get less NZ Super after tax. Their super is added to their other income, and taxed at a higher rate than for somebody receiving super only.

What’s more, some low-income superannuitants get extra money, such as an accommodation supplement, disability allowance, or special needs grant. Some can also get a community services card.

I’m not saying New Zealand’s system is perfect. Maybe it should be easier to get that extra money, and there should be more of it. But anyone who has looked at the forms Aussies have to fill out to get their means-tested state pension will agree that there’s a lot to be said for simplicity.

AI doubt if there’s a simpler way to deal with the situation after you die. But it would be interesting to learn how other readers cope with continual requests from charities.

It’s not always easy being charitable. One couple I knew when I lived in the US was audited by the IRS almost every year. They claimed a tax break for giving away such a big proportion of their earnings that it aroused suspicion. They were good people being punished.

And many of us have learnt that the more you give, the more you are asked. Recently I found myself explaining — nicely I hope! — to a woman from one of “my” charities that if she kept on ringing I would stop donating, but if she left me alone I would continue my regular donations.

But let’s not gang up on charities, which in most cases are only trying to help someone or something. Let’s just hear from anyone with a bright idea on how to make giving easier.

ANice try. But will it work?

To make your idea clearer for others, it’s made up of two steps:

• The parents open an account with the same bank as their adult children’s offset mortgage. The bank then offsets the parents’ account balance against the children’s mortgage balance, before calculating mortgage interest. The parents receive no interest.
• The children then make payments to the parents to compensate for their loss of interest.

The result is that the children pay lower mortgage interest, and the parents receive at least as much as they would have earned in an interest-paying account.

Would the parents’ income be taxable? I asked Inland Revenue. Their response: “As I’m sure you will understand we cannot keep commenting on variations on a theme.

“To reiterate — IR doesn’t give tax advice. To restate our earlier point, and also for the reasons well made in your published response, if your reader wants to keep exploring this type of arrangement they need to take advice from their legal and tax advisors.”

Okay. So I went to someone who does give tax advice, Louis McLennan, a tax partner at PwC.

“There’s nothing to stop parents lending to children interest-free, which is, in substance, what would be happening when a parent agrees to allow their savings account balance to be offset against their child’s mortgage balance,” he says. There are no tax ramifications from that.

“But if the children are making payments to the parents as compensation for their loss of interest, that’s taxable income. In substance, it’s a loan with interest. We would advise our clients to pay tax on those payments.”

But surely, I said, families lend one another money and Inland Revenue doesn’t know about it.

McLennan agrees that, “in practice, there’s probably cases where interest has been charged on family loans and not returned as taxable income, and previously it might have gone undetected. But now IRD has some incredibly sophisticated detection tools available to know what you are doing.”

You have been warned! Your two-step plan is still a good one, but skip the tax dodging.

P.S. Offset mortgages are offered by BNZ, Kiwibank and Westpac. They are variable rate loans, not fixed rate. Check the fees the banks charge.

AYour money will probably be safe with your bank adviser. But will it be correctly diversified and earn you the best return?

The chances that the suggested investments are the best for you, out of all available investments, are low.

I strongly recommend that you switch to an independent financial adviser who is not affiliated with any financial provider and takes no commissions. Instead, they charge you a fee, and should act in your best interests. With $600,000, it will be well worth paying the fee.

Read the Advisers page on this site, and approach some of the advisers listed at the bottom. Meet with several before choosing one.

AAll KiwiSaver funds, to my knowledge, are portfolio investment entities, or PIEs. They are taxed at somewhat lower rates than non-PIE investments. For example, the top PIE rate is 28 per cent, while the top income tax rate is 33 per cent.

Most non-KiwiSaver funds are also PIEs. Generally, I recommend investing extra savings in one of those, to retain access to your money. Watch out for fees though. Often they are higher than in similar KiwiSaver funds. In last week’s column, I wrote about how to choose a KiwiSaver or non-KiwiSaver fund, using the Smart Investor tool.

Keep in mind that if you want higher average returns over the years than in bank deposits, you should use a middle to higher-risk fund. Note, too, that your returns will be volatile.