Mary Holm 's Opinion

Mary Holm is a personal finance columnist for the NZ Herald.

Mary Holm: KiwiSaver needn't be only scheme

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It's a popular misconception that teachers - and others in the super scheme - are not eligible to join KiwiSaver. Photo / Getty Images.
It's a popular misconception that teachers - and others in the super scheme - are not eligible to join KiwiSaver. Photo / Getty Images.

Q: Who cannot join KiwiSaver once you are 18? Anyone in government superannuation schemes like teachers cannot join, presumably because they already have a scheme. Who else is ineligible for the $1000 freebie?

A: Wrong about the teachers! I decided to make this the lead Q&A in the hope that everyone will read it. There's too much misunderstanding about who can and can't be in KiwSaver. Here are the rules:

Anyone - from newborns to 64-year-olds, working or not working - can join if they are:

• A New Zealand citizen, or entitled to live in New Zealand indefinitely, and

• Living or normally living in New Zealand, and

• Under the age of eligibility for NZ Super - currently 65.

In many cases, state sector employees serving outside New Zealand and volunteer or charity workers overseas can also join. If you hold a temporary, visitor or student permit you can't join KiwiSaver.

That means that teachers and anyone else in another super scheme can also be in KiwiSaver. And they probably should be.

Most employers won't contribute to both schemes. And in many cases employer contributions are more generous to the non-KiwiSaver scheme.

But KiwiSaver is still worthwhile.

It can be a bit tough in the first year, as you have to contribute 3 per cent of your pay to KiwiSaver as well as contributing to the other scheme. But after 12 months you can take a KiwiSaver contributions holiday for up to five years and renew that as often as you like.

A clear advantage of this strategy is that you'll get the $1000 kick-start. But it's also possible to get more. On a contributions holiday, you can still contribute any amount you like. And if you put in $87 a month or $1043 a year - paid directly to the provider rather than through your employer - you'll get the maximum $521 annual tax credit. You're participating in the same way as the self-employed or non-employees do.

If you do this, you do have to contribute quite large amounts, in total, to both schemes.

But it's still your money, to enjoy in retirement.

Shopping for the best deal

Q: Recently I visited several banks as I had $100,000 to invest for 12 months. BNZ offered the best rate of 4.3 per cent interest monthly or 4.4 per cent with interest at the end of the year. When I asked which was the better deal, they couldn't tell me.

Compounding interest is supposed to be better but I wanted to be sure. I asked the teller to work it out and email me the result. He didn't. I followed up with the bank manager. She also felt compounding would be better but had no way to calculate it. I asked two other banks. They were all stumped.

I tried to work it out manually myself and to my surprise it seemed that 4.4 per cent gave you more at the end of the year. So I went with that. But I was amazed that no bank could give me the exact answer. Can you? I would really like to know. And I guess the banks would too!

A: Would it be too cynical to say that banks don't have much incentive to work out the better deal for you, given that it will be the worse deal for them? After all, they could have done what I did - search online for a compound interest calculator.

Anyway, well done for doing your own calculations, which came up with the correct answer. While compounding can make a big difference, it applies more over long periods. Also, the difference between the two interest rates is small. So the 4.4 per cent option is slightly better.

You can check this out on the standard calculator at www.tinyurl.com/compoundcalc. It shows that 4.3 per cent on $100,000 paid monthly comes to $4385.77, whereas 4.4 per cent paid at the end of the year comes to $4400. There's not a lot in it, especially after tax.

Speaking of which, if you go to www.tinyurl.com/compoundtax you can compare your two options side by side after taking tax into account.

By the way,next time you want to check rates at different banks, you might want to use www.depositrates.co.nz or www.interest.co.nz. It's quicker than visiting the banks.

NZ values illusory

I am a New Zealand national living and working in Seoul, South Korea. I read your pros and cons of home ownership in last week's column and was particularly interested in your comments regarding the non-tangible advantages of home ownership, being the ability to make a place your own and a measure of stability for the family.

Moving to Seoul three years ago was an absolute shocker for me. Many of my expectations built up over a lifetime were immediately challenged. Everywhere I looked things were different from New Zealand.

The first big difference is the type of property available. We chose an apartment. It is three bedrooms and a combined kitchen and living area on the 17th floor of a 22-storey block. It is smaller in total than the family room of our Auckland property. Shock horror, how can you live like that? No oven, a three ring gas burner to cook on, no dining room and one bathroom. It took about three weeks to adjust.

The apartments are all the same, values differ slightly depending on the level, view and exposure in winter. But for a variety of complicated reasons Koreans do not personalise their dwellings much, partly because of a lack of permanence.

There it is then, a lack of permanence and cramped living conditions, a recipe for widespread mental illness and social disorder, according to my way of thinking. Well not so. It is not easy for the average person living in Korea, much the same as New Zealand, but generally they are pretty happy with their lot. For myself I have discovered that you adjust very quickly to your environment.

The benefits of living in Seoul: cost of living is a major, our income is similar to New Zealand, but we have no need to own cars and our housing cost is about 30 per cent of what we were paying in Auckland. Rent, power, gas, water, body corp and data totals about $1000 a month. Food and clothing is similar to New Zealand.

Our daughter walks to school and attends several after-school classes. She is receiving a first-class education and she could continue her studies at a world-ranked university.

It is my experience that some of the values that New Zealanders hold dear are out of step with the modern world and are in fact quite illusory.

Things like a sense of security are readily transferable from one location to the next and can be achieved in almost any environment. You don't need to paint the walls your favourite colour or have a garden full of your favourite plants to have a sense of security.

For the young family that was the subject of your article, this means their decision should be based on purely economic considerations.

The question needs to be asked quite strongly through the media: are some of the values that drive prices and limit ownership in Auckland relevant in today's world?

A: The other day I happened to watch a video of the movie Chocolat, set in a small French town in 1959. The main character and her young daughter had frequently moved towns.

When someone asks the mother if her daughter minds, she says no, that the daughter enjoys their wandering lifestyle. But we later learn the truth - the young girl hates all the moving.

I suspect a child's desire to have one place to call home is universal. That desire often extends into adulthood. See the next letter.

Your daughter might well have adjusted to her smaller, humbler home in Korea, especially if her parents are content. But I would be surprised if she would relish repeated moves.

If New Zealanders are out of touch because of our willingness to put children's happiness ahead of economic considerations, who needs modernity?

Keep the home fires burning

Q: In your last column you pointed out the value in home ownership for young children - they don't have to keep moving if rental contracts end, etc.

One thing that always surprises me when you read the homes section of the Herald is how people are selling their home because their children are now at university. They seem to be quick to wash their hands of the kids.

One thing I observed with my children and their friends is how they love to come home to our small provincial town, and they value the familiarity of their home base - and over the years fill up my shed with their possessions as they move overseas or around New Zealand developing their careers.

I have even had their friends coming to stay because of a marriage break-up. Our humble abode was the closest they had to a familiar home.

My advice - don't rush in to selling the family home.

A: I agree. There are times, such as Christmas, when a family with adult children actually needs a bigger - not a smaller - base, And, as you say, the old family home can be quite a drawcard.

Another point: people sometimes move to smaller homes, once the kids are gone, in the hope that they will free up money to spend in their retirement.

The trouble is they often want a newer, low-maintenance place - perhaps on a bus route for when they no longer want to drive, and near shops, medical facilities and so on. It turns out that others want the same features, so homes like that aren't necessarily cheaper than the bigger family home.

Tax deductible fees

Q: I would like to know if the management fee on my KiwiSaver account is tax deductible? As the portfolio grows, any tax deduction would obviously be welcome.
I also have the same question relating to my ASB Master Trust superannuation scheme. Thank you for any advice.

A: Nice try, but no luck.
Says an Inland Revenue spokesperson, "No - a KiwiSaver investor cannot claim a deduction for any management fees.

"The income they derive from the scheme is exempt income because the tax is paid by the fund provider. The fund provider would claim a deduction for any fees charged before the tax is calculated. The income is then paid, free of tax to the investor.

"It should be the same for any portfolio investment entity (PIE), for instance an ASB Trust superannuation scheme."

In other words, by the time the income goes into your account, tax has already been paid and fees deducted. That's why the provider asks for your PIR rate, to make sure the tax paid on your behalf is at the correct rate for you.

Mary Holm is a freelance journalist, 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

Mary Holm

Mary Holm is a personal finance columnist for the NZ Herald.

Mary Holm is a columnist, best-selling author and seminar presenter on personal finance. She is also a director of the Financial Markets Authority and the Banking Ombudsman Scheme, and holds an MBA in finance. Previously she was business editor of the Auckland Sun and Auckland Star, and has worked for the NZ Listener, Australian Financial Review and Chicago Tribune. She has been called “The nation’s favourite investment agony aunt.”

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