- Family tree doesn’t explain why women are worse off in retirement
- Should we give more NZ Super to those in need?
- Reader seeks ideas on giving to charity
- Offset mortgage one way parents can help children buy a home — but not a tax break
- Look beyond bank adviser
- Investors in KiwiSaver and other funds pay slightly less tax
QStatistics report that women have less money in retirement and they live longer. Well while the latter is definitely true, the only thing one can conclude about the former is that the statistics are affected by solo mothers or divorcees.
In my family, in every case spanning four generations, when the great grandfather, grandfather, and father passed on, the money passed to the surviving spouse. In my own case my will leaves everything to my wife should I pre-decease her.
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.
QAn interesting look at how women manage their finances shows just how unfair NZ Super really is. Why should someone who is struggling to live on $21 per hour and paying a mortgage — like the woman in last week’s column — get the same amount in super as a multimillionaire?
A far fairer system would be to give everyone over, say, 65 years $250 per week super and then increase the amount for those who really need the money to live on?
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.
QWe give regularly (mostly once a year) to a number of charities and good causes. Last year there were 32 listed in our tax returns. We naturally get letters and emails encouraging us to continue giving.
We’re now fit and well in our mid-80s and have been discussing our wills with our solicitor. One chore we would like to minimize for our executors (principally our children) is dealing with the ongoing inflow of “begging letters”, email and hard copy.
The only way I can see is to prepare and maintain an email list of these good causes for our family to email with a form letter asking them to delete our names from their lists. (We plan in our will to give a number of bequests to a small number of the more important charities, but for the rest we must bid them farewell.)
Have other readers dealt with this question?
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.
QI am writing about the first Q&A two weeks ago, about loans within families. An offset mortgage might be an option to consider. The tax concerns might remain, but IRD would need to find another reason since this wouldn’t be a loan.
Other concerns — risks around loss of job or lawsuit, partnership ending, etc — would not be a problem for the parents. They’d still remain a problem for the homeowners, but the parents don’t lose control of their money.
With an offset loan, parents’ (and partner’s and children’s) everyday and savings accounts can be linked to a mortgage. The interest on the offset amount is zero.
The parents would retain control of their money. They could unlink the amounts, they could withdraw and repurpose it, etc. And there’d be no issues around repayment since it’s not a loan. It’s just a facility that allows the homeowner to reduce their interest cost. The homeowner could then organise payments to their parent based on the interest saved.
The IRD considerations would get murkier since there’s no debt.
There’d be some parental negotiation around a fair “interest” repayment, due to the gap between offset mortgage rates and fixed rates that the homeowner could get elsewhere. If the homeowner just pays the actual interest saved, the offset mortgage statement helpfully states how much was saved in interest in the given period.
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.
QPlease can you advise us. We’re late sixties, retired and have a balanced portfolio with a bank to cover trips etc for six years.
We’re selling a rental so will have $600,000 odd to invest. The present funds adviser assures us we are safe to invest this amount with them, ie everything in their portfolio. Is this wise, or should we use another company?
I know we could retain the rental to share the risk, but it’s in another city and we’re over rentals.
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.
QIn last week’s letter “Beyond the Bank” you mentioned putting extra money into your KiwiSaver account.
I have raised my contribution to 8 per cent and wondered if I might put in an additional $200 a month, via my bank account. Would that have any disadvantages? I realise that I cannot withdraw that money until I am 65, but is there additional tax to pay?
Because of the low interest that banks are currently paying on savings accounts, I could see this becoming a possibility for some.
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.
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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.