KiwiSaver return, with tax credits and employer contributions, unlikely to be as high as card interest rate
I am one of the first raft of New Zealanders entitled to access my KiwiSaver investment as of July 1, having been in the scheme for five years and being 65 years old on that date.
I work full-time, on quite good money, draw NZ Super, and have a mortgage balance of about $40,000 that will be paid off in the next two years. I have about $20,000 worth of credit card and other debt.
Should I draw some of my KiwiSaver (balance about $50,000) to clear the debt (on much higher interest rates than the mortgage), or pay off the mortgage? My gut feel is to repay the other debt.
I will continue to work for at least the next four years, am fit, healthy and well, and will also continue to contribute 8 per cent to KiwiSaver while I am still working.
My employer has offered to continue to contribute the 2 per cent employers' contribution while I am employed with them.
Your gut feeling is right. You should definitely withdraw KiwiSaver money to repay credit-card debt and any other high-interest debt. Most of the rest of the money should probably come off your mortgage - more on that in a minute.
But first, at the risk of sounding like a scolding parent, I have to say that you're coming to this a bit late. Here's what I would have suggested a few years ago, which is not much good to you now, but might help readers who don't yet have access to their KiwiSaver money.
Anyone at any age with credit-card debt will almost certainly be better off joining KiwiSaver to get the kick-start, but then taking a contributions holiday as soon as possible. While on holiday, use the money that would have gone into KiwiSaver for debt repayment. Restart KiwiSaver contributions when the debt is gone.
This is because the after-tax, after-fees KiwiSaver return, even allowing for tax credits and employer contributions, is unlikely to be as high as the credit-card interest rate. What's coming in isn't as big as what's going out.
With mortgages, it's not so clear cut. We're weighing up the net return on a KiwiSaver account, including government and employer contributions, against the interest on a mortgage. Who knows which will be higher?
Still, people like you, who are contributing more than 2 per cent to KiwiSaver, will probably be better off at least cutting their KiwiSaver contributions to 2 per cent and putting the rest into mortgage repayment. They'll still get the employer contribution and, as long as they earn $52,150 or more ($34,762 from April 2013), they'll still get the maximum tax credit.
Okay, but does all of this still apply to you, now that you can withdraw your KiwiSaver money, and no longer receive tax credits? In your situation, I suggest taking the following steps:
As soon as you can withdraw your KiwiSaver money, fully repay all non-mortgage debt.
Keep contributing to KiwiSaver to get the 2 per cent contributions from your employer, who is no longer obliged to contribute now that you can withdraw money, but is kind enough to do so.
However, reduce your KiwiSaver contributions to 2 per cent of your pay, and put the other 6 per cent into repaying your mortgage.
The tricky part is deciding whether you should transfer money out of KiwiSaver and into your mortgage, which you can now do whenever you like. I said above that it's hard to weigh up KiwiSaver returns and mortgage interest, but because you no longer receive tax credits that tends to tip the balance towards mortgage repayment.
And wouldn't it be great to get the mortgage out of the way? You could then put all your former mortgage payments, plus your 8 per cent savings, into making some rapid progress on your KiwiSaver retirement nest egg.
If you do make the transfers to your mortgage, don't let your KiwiSaver account run too low. If fees or tax payments reduce your balance to zero, the account will be closed. Discuss with your provider how big a balance you should maintain.
On speaking with others who are interested in economic matters, the question comes up of what exactly is the GDP. Confusion is widespread as to whether inflation is taken into account. To wit, can a GDP increase of 3 per cent and inflation of 5 per cent be taken as an increase in economic activity or an economic slowdown?
GDP, or gross domestic product, is the total market value of goods and services produced in a country.
When you see GDP growth rates in the media, these typically refer to "real" GDP, which means the number has been adjusted for inflation. If real GDP grows, there are more goods and services, as opposed to just more expensive goods and services.
Sometimes, though, people talk about "nominal" GDP growth, which is unadjusted for inflation.
I totally agree with feeling a bit miffed that some charities are suggesting I might like to "donate" my donation tax rebate back to them, as discussed last week.
I have a couple that I make a monthly donation to, and still I get letters asking for more. I realise that they send everyone on their mailing list the same info, but how hard is it to maintain a separate database to avoid this happening? It almost makes me cancel the transactions, but both groups do great work so I don't.
You're right about the money going to good causes, but nobody likes to feel manipulated. I like your idea of a separate database for monthly donors who tick a box saying, in effect, "once a month is enough".
Yes indeed, I was unhappy to get a "thank you, and do you know you can get a tax rebate for this donation and here is how you can give it to us" - as it happened also from two charities. This is the first year I've ever had this suggestion put to me. I may reconsider donating to them next year.
Wary donor Like you I got two IR526 forms from charities with their name filled in. My feeling is that I need that rebate and I can send more money during the year, knowing that I shall get one-third back.
I know many people have become rather disenchanted with the attitude of charities these days. Not long after one has sent a donation another request comes. I have become very wary of sending money for a charity's annual appeal as I know I shall be put on their mailing list for eternity.
Getting money for charities, of which there seem to be a great number, has now become a competitive business, and I wonder how much of our donated money is spent on fees for public relations consultants, salespeople, etc. Not much you can do about this, but I have had my say, which is basically that I agree with your comment about piggies. (Nice picture).
I'm sympathetic to the idea that charities have to put some of their money into admin. It can't all go to the front line. But I agree with you - sometimes it feels as if admin includes working out ways to con us. Enough!Gift Aid idea I noticed your comment on the charities that send a rebate form with their IRD number on it. There are some subtleties here. When you donate the tax rebate, you are making another donation, which accrues a tax rebate, which is another donation, etc. These donations tend to be lost, so it is probably good for Treasury. I hadn't thought of that. It could become quite a spiral.
Perhaps we should adopt a system like the UK's Gift Aid scheme. As long as you pay tax at least at a certain rate, you can fill out a Gift Aid form that you give to a charity along with a donation. The charity can then claim back tax that you paid on the money before you donated it. For example, if you give £10 using Gift Aid, it's worth £12.50 to the charity. It gets the other £2.50 from the Government.
Apart from being simpler, the system means that you decide, upfront, whether you want to also give the tax break to the charity. That feels much better than having the charity doing an Oliver act later on.
St John confusionThe first letter in your column last week makes an error, which you failed to correct. St John is a charity but donations it receives are not tax rebate-able. I don't know why? Perhaps you could ask.
You seem to be muddling subscriptions and donations. St John's website explains that if you are a subscriber to the St John Supporter Scheme, which gives you free ambulance service, the membership fees are not tax-deductible. That's because "The IRD makes a distinction between making donations to a charity and paying subscription fees."
However, the website goes on to say, "Donations of $5 or more are tax-deductible and a receipt will be sent with your St John Supporter membership information."
I read with some interest the letter from your correspondent last week re Southern Cross healthcare. My wife and I are on that same programme and have been for years. Unlike your mother, I think it is not cheap and nasty, it makes health insurance available to many people who otherwise could not afford it.
We probably paid into it for 25 or 30 years without a claim, but as I have got older I have made up for that. I am now 86. Over the past 20 years or so my wife and I have had quite a few big claims, mostly for me. For the most part Southern Cross has paid 80 per cent when you have an op, which costs thousands. The $100 surcharge is chicken feed.
Sometimes there is the odd hiccup. It seems to happen when the claim is not very big.
If it was not for the Government whacking us for GST our premiums would be that much cheaper.
Great to hear you're happy with the scheme. Let's change the description to "cheap and nice".
Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. 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 firstname.lastname@example.org or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (pref daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.