Mary Holm on investing

Mary Holm is a personal finance writer

Mary Holm: KiwiSaver a good kickstart for kids

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It's worth opening an account for the $1000 boost because who knows when it might be halved or removed

It's a great idea to contribute a small amount each week to a child's savings and watch it grow. Photo / Thinkstock
It's a great idea to contribute a small amount each week to a child's savings and watch it grow. Photo / Thinkstock

Q: It was our intention when we had children to set up KiwiSaver accounts for them when they are born, and make $20 weekly contributions to put them well on their way to a first-home deposit when they hit their 20s, and/or kick-start their retirement savings.

As there is no member tax credit for those aged under 18, are we still best to go ahead and sign our child up to KiwiSaver, or to put the $20 weekly into an interest-bearing account? The latter provides more flexibility, the former a $1000 kick-start.

A: KiwiSaver or not, it's a great idea to contribute a small amount each week to a child's savings.

At an annual return of 3 per cent after tax, $20 a week will grow to more than $28,000 in 20 years. As you say, a great start for a home.

And if the child saves through KiwiSaver from age 18 onwards - which is usually the best way for an adult to save for their first home - she or he may also get the $3000 to $5000 Government subsidy.

But in the meantime, is it best for you to save for the child in a KiwiSaver or elsewhere?

I suggest you open a KiwiSaver account to get the $1000 kick-start. Who knows when it might be halved or removed - especially if KiwiSaver becomes compulsory?

But after that, there's no advantage to your contributing to KiwiSaver over other savings vehicles. And, as you say, you lose flexibility. Rather than buying a home, your child might want to spend the money on starting a business, or doing graduate study overseas, or - gulp - partying.

If you were worried about that last option, moving the money into KiwiSaver at some point might be a wise move! But hopefully that won't be an issue.

If you want to choose a higher-risk investment than an interest-bearing account - in the expectation that over 20-plus years the money will probably grow more - look into non-KiwiSaver funds run by KiwiSaver providers. Choose one with low fees.

There'll be more Q&As on kids and KiwiSaver in the next few weeks. But next, one for the older members.


What to withdraw

Q: I am 66 and have been in KiwiSaver since the beginning. I am still employed part-time and have $18,000 available in my KiwiSaver account later this year.

Can I withdraw part of this investment and leave the remaining portion still in the scheme? I intend to continue working.

A: You can take out as much as you want whenever you want. But if you think it's a good spot for your savings, there's no reason not to leave some there.


Student loan

Q: I refer to your correspondent last week asking where the daughter might invest her 21st birthday lump sum.

The daughter had a student loan that she expects to clear in a couple of years. So I was surprised that you didn't mention the option covered in earlier published correspondence regarding my family decision to pay off student loans and get the immediate 10 per cent early repayment bonus before this option is removed on March 31, 2013.

Surely that is still one of the best returns currently available. Once the loan is paid off, in addition to the 10 per cent bonus that will have been received, the daughter might then consider saving the money from her salary that otherwise would have gone to future loan repayments to replace the 21st birthday lump sum. Is this a reasonable option to consider?

A: Good thinking.

The man who wrote last week's letter said his daughter "is used to the student loan payments and therefore they are not an issue in her monthly income". He went on to ask questions about putting her gift money into KiwiSaver, so I concentrated on answering his questions.

But you're right, it would have been good to also say that if she repays her student loan before the end of next March she will benefit from the 10 per cent early repayment bonus, which is being phased out.

As I've said in the past, it's worth taking advantage of this bonus if you are within about three years of repaying your student loan via deductions from your pay.

Number crunching shows that if your loan is likely to run longer than that, even if you have savings that could be used to repay the loan, it's better to ignore the bonus and continue pay deductions. That's because you can earn interest on your savings in the meantime, while paying no interest on the student loan.

But last week's daughter is in the "within three years" group, so she should consider grabbing the bonus while it's there.

I agree that it would be good if she then saved what would have gone into student loan payments. The easy way to do this would be to set up an automatic transfer into a savings account the day after every payday.

Some further points:

• The analysis above looks purely at financial issues. Some people prefer to get rid of debt for psychological reasons, or to free up money for others to borrow. If that's you, do try to repay your loan - or as much as you can - before next March 31 to benefit from the bonus.

• If someone with a student loan goes overseas, they are then charged interest. This complicates the situation, and it's probably best to just repay the loan before leaving New Zealand, if possible.

• The bonus works as follows: in a tax year, if you make extra payments of $500 or more above your compulsory repayments, you get a bonus of 10 per cent of the extra amount. For example, if you pay $800 extra, it's treated as if you had paid $880 extra. For more information, go to www.tinyurl.com/repayloan.

If you are repaying the whole loan, note the way the maths work. The maximum bonus is 1/11, not 1/10, of your total loan.

For example, on a $1000 loan, if you mistakenly repaid 9/10, or $900, the bonus would be $90 and there would still be $10 outstanding. Instead, you should repay 10/11, or $909.09. The 10 per cent bonus would be $90.91, which means you've repaid the lot.


Taxable gains

Q: On The Block NZ item in your last column, the brother and sister team or any of the other competition winners' gains should not be taxable, unless they are professional "gamers". Like Masterchef winners of the past, prizes are not taxable.

But if they were taxed I think the losers of these long reality TV competitions could claim a "loss" if the department was consistent. To be fair, the IRD should chase the "losers" and remind them of their opportunity to make a claim for their loss.

Why have we become so nasty to want them to be taxed? We won't pay less tax. BTW, we also don't pay tax on Lotto winnings, although we pay tax on the Lotto ticket.

A: My understanding is that the people in The Block NZ weren't winning a prize but making a gain on the sale of a property, so they would presumably be taxed like anyone else making such a gain.

Lotto winnings, on the other hand, "are not taxed as they are not income for tax purposes", says an Inland Revenue spokeswoman.

On claiming losses, she adds: "We cannot comment on the consequences for individual participants in a TV or game show. As a general comment we would note that it seems unlikely to us that individual contestants would be in a position to suffer a loss."

A loss could, of course, occur if someone - in a TV show or not - bought a house with the intention of selling it at a profit, spent money on doing it up, and ended up selling for less than the purchase price plus do-up costs. That's a situation in which a profit would probably be taxable, so a loss would probably be deductible.

But should Inland Revenue chase losers? "New Zealand operates a self-assessing tax regime and taxpayers in this situation should talk to their tax adviser," says the spokeswoman.

I agree with that. I can think of better ways to spend taxpayer dollars.

Speaking of which, we will indeed pay less tax in the long run if people who make taxable gains pay their share. It's no nastier asking them to pay than asking any other hardworking Kiwi to pay.


Financial comparisons

Q: As always, I enjoyed your excellent article on comparing banks in last week's Herald, and thought I should let you know about our new financial comparison tool at priceme.co.nz/finance, which is free for consumers to use.

A: Flattery will get you everywhere - including getting a free plug. And why not?

Your website looks good, and compares banking - and many other products - in a different way from the websites I mentioned last week: interest.co.nz, depositrates.co.nz and mortgagerates.co.nz.

Your site also includes some features that many readers will find helpful.

I've got no idea whether yours and the other sites are always accurate. There are a lot of numbers to get right. Readers might want to check all the websites before making a decision.


Feedback to provider

Are you happy - or unhappy - with the way your KiwiSaver provider communicates with you? Here's a chance to let them know.

I've long said that one of the most important qualities of a KiwiSaver provider is that they communicate clearly and understandably to their members - whether electronically or on paper.

Workplace Savings NZ, an association that includes many providers among its members, is asking the public to vote on the quality of their KiwiSaver provider's communications - from very poor to excellent. The winning provider will receive Workplace Savings' People's Choice Award.

Each voter goes into a prize draw to win one of eight $250 contributions to their KiwiSaver account. Voting closes on November 28. You can vote at tinyurl.com/kiwisaver-com.

Note: There's a danger that a big provider will win, just because it has more members. But not if it gets more poor votes than good votes. So do take this chance to voice your negative feedback - or, of course, your praise if it's deserved.


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 mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.

- NZ Herald

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