Using savings-scheme money to get into a home is a legitimate way to further financial and general welfare

Q: My 29-year-old daughter has finally settled into a career position with a stable employer who offers no pension plan other than a contribution to KiwiSaver. She has a modest KiwiSaver balance from previous jobs and is thinking that in a couple of years she will withdraw hers and her employer's contributions and use that and the $5,000 first home subsidy for part of a deposit on a house.

I question the wisdom of doing this as I read somewhere that if you contribute $2,000 a year to a plan for 10 years and then take a contribution holiday until you retire you will have, thanks to compounding, more than if you take a holiday now and after 10 years start contributing $2,000 a year until you retire.

I also fear if she stops her contributions, she will never restart and end up with very little in her KiwiSaver when retirement comes. I know individual circumstances are always different but in general would you encourage or discourage someone who wanted to raid their KiwiSaver funds to buy a house?


To be honest, I had two immediate responses to your letter. One is that, at 29, your daughter seems old enough to make up her own mind. The other is that many people with spendthrift adult children would love to see them set the sort of goals your daughter has set. In other words, let her be!

Still, it's hard for a parent not to offer a bit of guidance.

On what you read about contributions and holidays, it depends on the return you earn. If we compare someone who contributes regularly from age 20 to 30 and then stops with someone who contributes from 30 to 67, the second one will end up with more at retirement on returns of 6 per cent or less. It's only on higher returns that the first will end up with more.


But I'm being too pedantic. Your main point, I'm sure, is that it's great to have money growing in KiwiSaver over many decades.

Keep in mind, though, that a similar argument could be made about home ownership. Your daughter will be building up equity in a house if she buys while she's still young.

The goal for most people is to reach retirement with a mortgage-free home and some savings. And it probably doesn't make much difference financially whether you get started on the house earlier and concentrate on the savings later or the reverse.

If your daughter does buy a house soon, she has three options after the purchase. One is to just make regular mortgage payments and do no other saving - which is what you fear. But give the woman some credit. She seems to be goal-oriented, so hopefully she will want to either continue her contributions to KiwiSaver or repay her mortgage faster than she has to.

In the long run, your daughter will probably be better off if she keeps contributing to KiwiSaver, because of the government and employer contributions. Also, it diversifies her savings away from just property. So hopefully she'll do that. But it's her choice!

Another important point: There are many non-financial reasons to want to own your own home as soon as possible. You have more security, pride of ownership and control over your environment. And you are free from landlords kicking you out - even if you are a perfect tenant - because they want to sell the property.

All in all, I don't think your use of the word "raid" is fair in this context. Using KiwiSaver money to get into a home is perfectly legitimate, in terms of furthering your financial and general welfare.

Student loan query
Q: I have a substantial student loan ($60,000) and a growing KiwiSaver balance ($30,000). Do you know whether, when KiwiSaver was being formulated or since then, there has been any consideration of using the one to pay off the other? If not, do you think it is something the Government should consider?

I know it makes little economic sense for KiwiSavers (assuming returns are positive), because the student loan interest is written off (assuming the borrower isn't heading overseas), particularly given that positive returns will compound.

But, as you often point out, not all decisions need to be economically rational. Some people may just like the comfort of clearing the debt, particularly given that the compulsory loan repayments eat up a substantial portion of after-tax income. Indeed, the resulting increase in disposable income could be used to substantially increase savings contributions.

Moreover, if such an opportunity was widely taken up, it would put lots of money back into the Crown bank account, allowing the country to use a non-interest earning asset, which wouldn't otherwise be liquid, to clear interest-bearing debt.

There may well be a good reason not to do it but to me as a lay person it seems sensible (although I wouldn't like to see it compulsory).
A: I've not heard any serious talk of using KiwiSaver money to repay student loans. It's more the opposite - that it shouldn't even be used to buy first homes or anything other than for retirement savings.

I disagree with the argument against using the money for first homes for two reasons. One, as explained above, is about reaching retirement with a mortgage-free home plus savings.

The other is that when I teach university students or talk to other young people about KiwiSaver, discussing retirement with them is pretty meaningless, but buying a first home is a realistic goal. I suspect KiwiSaver uptake and interest would be much lower among the young without the first home help.

You could argue that both of those points also apply to student loans. Clearly it's not good to reach retirement with debt, and student loans are largely a young person's issue.

However, unlike buying a home, repaying an interest-free loan faster than you have to is not very clever financially, as you acknowledge. You're better off saving, in KiwiSaver or elsewhere, and earning returns on the money. So, while some people might indeed take comfort from getting rid of their debt, I'm not sure I would applaud the Government's encouraging non-optimal financial behaviour by freeing up KiwiSaver money.

You're absolutely right that it would be good for the Government's coffers. But so would raising income tax or GST or introducing a new tax or cutting spending or any number of other moves.

That's not reason enough for a policy change.

Try to put the student loan to one side in your mind, just letting the balance dwindle through your compulsory payments, and concentrate on growing your KiwiSaver account for a first home or comfy retirement.

Renovation costs
Q: Reading your response on how properties would be valued in the event of the introduction of a capital gains tax, you don't address what happens in the event of a renovation of the property that results in a much higher sale price.

Would the seller then need to go to the cost of having a set of accounts prepared to prove the costs spent, as you wouldn't want to pay tax on $200,000 of renovation that has been paid for out of tax-paid dollars?
A: Quite. And you won't have to pay tax on that if Labour comes into power and introduces a capital gains tax.

People will be able to deduct capital improvements from their gain. What sort of proof would they need? "Similar rules to those which apply to deductible expenses will apply; that is, bank records, invoices and, where applicable, receipts," says David Parker, Labour's finance spokesman.

Capital gains options
Q: I find David Parker's answer to the question in a recent column about capital gains tax valuations interesting.

Capital gains tax on non-primary residences was introduced in South Africa in October 2001 and I believe they had a fair way of implementing it from a valuation point of view.

The tax authorities gave you two options:

• A private valuation done at the time capital gains was introduced, at the owner's expense. (Municipal/government valuations were not used.)

• If you did not get a private valuation you defaulted to a market-related time apportioned valuation.

This I believe is the fairest method, and it surprises me that the Labour Party has not brought up this option.

It worked as follows: If you bought your investment property 10 years before implementation of capital gains tax for, say, $100,000 and then sold the property 15 years later (five years after capital gains was implemented) for, say, $1 million, then your capital gain for tax purposes was $1 million less purchase price of $100,000 multiplied by 5/15 years.

This equates to the gain of $900,000 multiplied by 1/3, giving a capital gain of $300,000 for the purposes of capital gains tax.

This means if there was an earthquake or downturn between your purchase date and your selling date you would make a lower capital gain (or loss). You would only pay tax on this lower gain or nothing on the loss - fair?

I fail to understand how Labour can propose to use a government valuation system used for rating purposes for a market-driven capital gains tax, especially when it's impossible for these valuers to be up to date and the government valuers do not enter the house.

Government valuations for rating purposes may value two properties the same, although one may have the finest fittings and improvements while the next may be outdated, shabby or leaky, which is totally unfair from a capital gains starting point of view.

Hope you find my thoughts interesting.
A: I do indeed, and so does Parker. "Yes, we are aware of the valuation approach taken in South Africa and considered it at the time we developed our CGT [capital gains tax]," he says. "We have not ruled it out."

On your comments about problems with government valuations, Parker says, "People would not be forced to use Government valuation." There will be other options.

By the way, that's a pretty amazing return in your example. For an investment to grow 10-fold in 15 years, the annual return is close to 17 per cent.

I know that sort of growth happened a few decades back in New Zealand, but that was when inflation was also in the teens.

Still, it made the example easy to follow.

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 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.