Q: I'm a big fan of Kiwisaver. I have contributed 4 per cent ($50) a week for six years and now have $30,000 in my account.
I was made redundant last November and have not contributed to my fund since then, as I am now a student (not working). However, the unit value of my KiwiSaver growth fund has risen from $1.08 to $1.137, adding $1500 to my savings!
I have 20-plus years to retirement so am happy with the growth fund for now.
For people who choose to or must take a contributions holiday, then all is not lost.
A: Indeed. But be aware that you won't always see growth when you're not contributing to KiwiSaver. All KiwiSaver funds can be volatile. And in growth funds in particular - which hold mainly shares - your account will grow only when the sharemarkets grow.
Usually they do. The New Zealand and US markets certainly have lately. And looking back 30 years - to get a better perspective - there has been only about a one-in-four chance that a fund invested fully in shares will lose value over a year, as our table shows. What's more, the longer the period, the less likely you'll lose ground. At 10 years, there's a mere one-in-56 chance.
The table also shows that if you're in a balanced fund that invests half in shares and half in bonds, the chances of getting the booby prize are lower still, especially over long periods. The one-in-2109 chance over 10 years means you are pretty much certain to see a balanced fund rise over that period.
I'm not saying, though, that you should move to a balanced fund. I agree that if you're more than 20 years from retirement, a growth fund is likely to give you higher long-term growth.
Still, there are certain to be periods - sometimes lasting more than a year - when your account balance will fall. And every now and then it will fall a lot. When that happens, stick with it.
KiwiSaver and new job
Q: Further to the lead Q&A in your column last week about a young man - already in KiwiSaver - who didn't realise for 18 months after starting a new job that the new employer wasn't taking contributions out of his pay or making employer contributions. I'm surprised a situation like that can arise and go on for 18 months because of the following.
When employment commences, the employer is obliged to ascertain whether the automatic enrolment rules apply. Obviously as part of that process the employer must ask "Are you in Kiwisaver?" If yes, then where is the KS2? If no, then the employee is automatically enrolled (but can opt out later).
As the employer did not ascertain whether the automatic rules applied, he or she contravened the KiwiSaver Act and should be subject to substantial IRD penalties pursuant to Section 215 of the act.
The act says when the employee starts work they are obliged to tell the employer whether or not they are in KiwiSaver. The act says the employer is obliged to tell IRD if the employee is automatically enrolled. The employer should have insisted on the employee confirming whether or not he was a member so that the employer could advise IRD if necessary.
The employer failed in his obligation to ascertain whether IRD needed to be notified. Again an offence under the act.
Although the employee failed in his obligation, the employer in this case was really slack and should be penalised by IRD accordingly.
A: I have a lot of sympathy with the idea that the employer should be held more accountable than seemed to be the case when reading Inland Revenue's responses last week.
But the department is sticking to its guns. In response to your claim that the employer should be subject to penalties, an Inland Revenue spokesperson says, "The obligation here falls on the employee not the employer. As there is no obligation on the employer under the KiwiSaver Act, they cannot be in breach and therefore subject to penalty."
And in response to your charge that "the employer failed in his obligation to ascertain whether or not IRD needed to be notified", the spokesperson says: "The employer appears to have met their KiwiSaver obligations in this case."
Maybe the KiwiSaver Act should be changed. In the meantime, as noted last week, it's a case of "let the employee beware".
Q: In a recent Herald column you suggested three ways of keeping an inheritance as separate property. There may be another alternative - utilising the Public Trust's "inheritance trust" product.
This was offered to me about 10 years ago and with help from the Public Trust was easy to set up. Essentially on my death my estate will be transferred into an inheritance trust in the name of the person I have nominated.
This seems to differ from a family trust in that it is not set up until my death. I would be interested in your comments.
A: Good thought. And other solicitors can also draw up similar trusts. But they might not always work the way you want.
"The problem with this is that the first claim against an estate is under the Property (Relationships) Act 1976," says Deborah Hollings Chambers, QC. "So, if there is a surviving spouse, their entitlement gets considered effectively before the property is transferred into a trust created by a will."
The same thing happens if your children or others make a claim under the Family Protection Act 1955 - under which wills can be overruled if someone has a moral entitlement to inherit. Such a claim would be considered before the will is put into effect, she says.
"If there is no spouse, and the family are agreed that an inheritance trust is perfectly acceptable, and there is no challenge to the estate, then that will proceed," says Hollings Chambers. She adds, though, that that simply can't be predicted. "In my experience the views of relatives can change very rapidly after the funeral is over."
Still, the Public Trust says these trusts can work well. "Inheritance trusts are often put in place with the agreement of both spouses to provide a benefit for their children without transferring assets into their names. This provides some protection in the event a child subsequently faces a relationship breakup," says a Public Trust spokesperson.
Q: A lawyer set up a heritage trust for a dear friend many years ago to protect her family in the event of any marriage breakup. As I understood it, should the couple part, then the inheritance must stay within the family and does not include other partners. Worth a look at it perhaps.
A: You're right, says Deborah Hollings Chambers.
Let's clarify first that your heritage trust, the inheritance trust in the previous Q&A and the separate property trusts some lawyers set up are basically all the same. We're not talking about a type of trust specified within the law, says Hollings Chambers. These are all just trusts set up to achieve a particular purpose.
A trust like this could own a house after the parents die, in which their child and a partner live. If the couple split up, the house wouldn't be relationship property to be divided with the partner. It would stay in the trust.
Hollings Chambers warns, though, that if you don't want to share property with your children's current or future spouses or partners, take care not to include those partners as beneficiaries - either by name or by "status category".
That last bit means you shouldn't say, for example, "my children's future partners".
"To minimise the risk of an attack on the trust in the event of divorce, the partners should not be referred to at all in the trust deed," she says.
"Historically, accountants and lawyers sometimes named spouses in trust deeds for tax reasons." A family might pay lower tax, for instance, if payments were made to a non-earning spouse. But you could lose more from a claim through the Property Relationships Act than you ever gained from tax.
Q: Thanks for publishing my letter about relationship property and your answer last week. Permit me a final brief response:
• I could live with the status quo if the consequences of the Property Relationships Act were better publicised and if an agreement to opt out of the act's provisions could be verified by a judge as sound when it's drawn up (not at breakup time).
• We've still got the problem that very few people who should contract out do - because it's the scariest thing to do when you're in love, optimistic and not wanting to scare your partner off. (Although proposing an agreement is one way of finding out if your partner has a hidden agenda.)
A: You're probably right; that many people aren't aware of the act until too late. There needs to be more info out there. Hopefully this column is helping a bit!
And I agree that it would be good to be able to get an agreement approved in advance. Still, if you can honestly say that your agreement has been drawn up fairly, with both sides fully aware of what it means, you should be reasonably confident it would stand up in court.
I doubt if anyone has measured how many people contract out. But yes, it must be difficult for some people to bring up the idea. A couple of suggestions:
• The dating websites could include a question in people's profiles: "Are you willing to contract out of the Property Relationships Act?" Would-be partners would know where they stood before meeting.
• You could say to your loved one: "My darling, I will never ever leave you. But you are so wonderful that many people must be wishing they were the lucky one who has you. One day, you might be tempted away from boring old me. Even though I would be devastated, it would help just a little to know that I wouldn't also be broke."
Now, if you'll excuse me, I've got work to do on my romance novel.
• 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. 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 (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.