Q Last week you had a question from a self-employed painter/ decorator whose wife felt that they should pay off their mortgage before joining KiwiSaver. You explained very well that the authorised financial adviser he had spoken to probably had their best interests at heart, as KiwiSaver does not pay big commissions, but you did not say whether in fact he should join KiwiSaver. Mortgage first - or KiwiSaver?
A: Thank you for the opportunity to complete the question posed last week. I wonder how many readers noticed that I ran out of column space before answering both questions.
Many self-employed people do not join KiwiSaver for two main reasons. One is that they have to make an active choice - as there is no employer to opt them in - and getting the paperwork done can be a hurdle for busy people. Secondly, without the benefit of an employer top-up, the advantages are not as significant.
However, if it comes down to a simple equation, as long as you contribute $20 per week KiwiSaver wins hands down. This is because all eligible members contributing $20 per week (or $1042 per year) currently receives $521 in MTC each year - a 50 per cent return on their investment. Each new member also receives the $1000 kick start.
There are some who argue that it is better to pay off debt first. Unless their debt is very large and putting them into severe financial stress, I would argue that setting up a KiwiSaver account and contributing $1042 a year to it will do more for their financial security.
If a self-employed person's income is very irregular and they don't want to commit to $20 a week, they can still join KiwiSaver to get the $1000 kick start, and make ad hoc contributions as their cash flow allows. This is far harder than letting a direct debit do the work, but may offer enough flexibility to persuade a reluctant self-employed person to join.
It is better to join now, than wait until cash flow improves. Why? Because the joining date is important for getting member tax credits in the first year. Someone who joined in July is entitled to full MTC after 12 months, even if they don't make any contributions themselves for 11 months. As long as they contribute $1042 by June 30, 2014, a person who signed up in July 2013 will receive the full $521 of member tax credits.
We are into August now, so MTC will be pro rata'd accordingly, and every month you delay you potentially lose another $43 in MTC.
Self-employed people are often independent entrepreneurs and risk takers, and this helps them to be successful in business.
To them saving $20 a week may seem inconsequential. But getting into the habit of saving is a valuable life skill. Too many people keep doing what they do because they have backed themselves into a financial corner and can't get out. Paying off debt sooner rather than later and building up a nest egg will give individuals and their families more choices in the future, if their circumstances change or they simply want to down tools and go in a new direction.
Shelley Hanna is an authorised financial adviser FSP12241. Her disclosure statement is available on request and free of charge by calling 870 3838. The information contained in this article is of a general nature and is not intended to provide personalised advice. Send your KiwiSaver questions to firstname.lastname@example.org. You can read earlier columns at www.peak.net.nz