A financial gift for both the giver and recipient
Christmas or not, here’s a way you can give to someone else and also gain yourself. Sponsor an adult who is struggling financially to make the most of KiwiSaver.
You help them to contribute enough to receive the maximum government contributions, by lending them the money — at a relatively high interest rate if you wish. The recipient will still come out well ahead.
Why limit it to helping adults? Only people 18 or over receive the KiwiSaver tax credit, which matches their contribution up to $1043 per year, after the first year. And it’s the tax credit — with a bit of help from the $1000 kick-start — that makes the whole thing work. It’s simpler if you sponsor someone not too far off retirement, but you can do it for any adult.
Let’s look at an example of Jack, a non-employee who has just turned 55 and can spare only $20 a month for KiwiSaver. It’s still worthwhile for him to join, but he can do much better if Jane lends him $67 a month. That will bring his total annual contribution to $1044, so he will receive the maximum tax credit.
If the return on Jack’s KiwiSaver fund is 5 per cent a year, by the time he turns 65 and can withdraw his money, he will have about $28,000.
At that point, Jane gets her money back. How much? Using a regular savings calculator, such as the one on www.theshapeofmoney.co.nz, she types in $67 a month for ten years and gives herself a generous return of 8%. The calculator shows that Jack owes her about $12,200. He keeps the remaining $15,800.
If he had contributed just his $20 a month, he would have saved around $6,500. He’s gained an extra $9,300, and Jane has also done really well.
She could support Jack even further, by charging just 4 per cent on the money. According to the calculator, Jack would then owe her $9900, leaving him with $18,100. And if Jane made the loan interest-free, he would owe her $8040 and keep almost $20,000. That’s triple the $6500 he could save on his own.
Where has the extra money come from? Not only has the government given Jack higher tax credits, but he has received compounding returns on that money, which makes a big difference over time.
If Jack were an employee, he would have to make KiwiSaver contributions from his pay. But Jane could give him, say, $20 a week for day-to-day expenses, freeing up the equivalent amount to go into KiwiSaver. At withdrawal time, Jane would do the calculations as if she had put $20 into KiwiSaver each week.
A few points to note:
- Sponsorship is one way that people over 65 can be involved in KiwiSaver. If the sponsor is reasonably well off, they might forgive the debt. If not, they might go for an 8 per cent return, which would give their savings a good boost later on — as long as they are still around when the person they help withdraws their KiwiSaver money!
- If there’s no plan for debt forgiveness, the sponsor must rely on the other person to repay the loan. Or you might want to draw up a legal agreement.
- If you sponsor a younger person, it may be many years until your loan is repaid — although if the person comes upon better times they may repay you early.
- Keep in mind that friendships can change over the years. Some people say there’s a golden rule that says, “Don’t lend to a friend”.
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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.