Q: It is with fear, trepidation and shame I write to you. I am quite lost.
My partner and I were made bankrupt two years ago and have struggled since. We lost our house, business and assets, through our business collapsing after supplying a larger company which itself suffered losses.
We now live in rented accommodation and have a scant pension to look forward to. Despite attempts to find work my husband, who is almost 60, has been unable to get anything that pays well enough for us to just manage from week to week.
I have a job that pays enough for us to pay our bills and yet we are unable to save. But my health is declining and I find it difficult to function properly and have concerns about being pushed out as I have had many sick days.
When we have tried to put some money aside, something like a repair or medical bill presents itself and we can never quite get on.
We are unsure what to do. We earn too much to get any benefits and appear to have no future. We really don't know who to trust. Is there any glimmer of hope out there?
Thank you for your consideration.
A: Gosh, you've had a tough run.
Your story illustrates some of the downsides of running your own business. There are lessons for others, such as not relying too heavily on any one customer and not putting your family home on the line.
But that's no help to you.
And after holding your letter for a couple of weeks while I thought about it, I'm afraid I haven't come up with any brilliant ideas.
My only suggestion might make you angry, but I'll try anyway. It's to get free budgeting advice from the NZ Federation of Family Budgeting Services, whose website is www.familybudgeting.org.nz. I suspect you'll respond that you already know how to budget, but they might come up with ideas you haven't thought of.
The best solution, though, would be to come up with a new source of income. Other readers might have some thoughts. Anyone?
Tax rate on KiwiSaver
Q: I have recently been thinking about joining KiwiSaver. However, in the last week or so I heard a speech by Peter Neilson on TV re KiwiSaver. He said members pay 50 per cent tax on their contributions.
I am certainly now thinking twice about joining, as are a couple of my acquaintances. Why is the tax rate so high on KiwiSaver?
A: There's irony here. Peter Neilson is chief executive of the Financial Services Council, whose members include many KiwiSaver providers. I'm sure he doesn't want to discourage you or your acquaintances from joining KiwiSaver.
But let's start with your question.
The tax rate on KiwiSaver earnings - as in the percentage of income that goes to Inland Revenue each year - is a lot less than 50 per cent.
Almost all KiwiSaver funds are portfolio investment entities, also known as PIEs. And the income on PIEs is taxed at lower rates than income on other investments like bank term deposits. For example, the top PIE tax rate is 28 per cent, whereas on other income it's 33 per cent.
So tax is not a good reason to stay out of KiwiSaver.
However, at a Financial Services Council conference this past week, Neilson said the "effective" tax rate on KiwiSaver can be higher than 50 per cent.
What he was referring to is the effect of paying tax on your long-term savings total. In some scenarios, if you paid 28 per cent tax on your KiwiSaver earnings every year for 40 or 50 years, you would end up with less than half the total savings you would have if you paid zero tax.
It's the result of compounding. A similar thing happens with paying fees on an investment. The annual fee might be 1 per cent of your savings total. But if you pay that fee every year over many years, it ends up reducing your savings total by much more than 1 per cent.
It's important to note here that:
Other PIE investments are affected in exactly the same way. And non-PIE investments like bank deposits are hit even harder by tax.
If you invest in a riskier KiwiSaver fund that holds largely shares, the tax rate and effective tax rate are considerably lower because of dividend imputation and tax breaks on capital gains.
The fact is, though, that tax on KiwiSaver is higher than on similar retirement savings in Australia, the UK and elsewhere, said Neilson. He added that it's also higher than on many rental property investments - especially highly mortgaged, short-term investments.
That's not really a fair comparison. KiwiSaver is an entirely different type of investment, in almost all cases a lot less risky than such a property investment. But still.
Neilson went on to say the Government should reduce the PIE tax rates on retirement savings. It could make up for the loss in revenue by reducing the KiwiSaver Government incentives.
"If we removed the $1000 up front and the annual $521 tax credit, the Government could use the money to cut the PIE tax rates on retirement savings from the average 17.5 per cent down to an average of 6.4 per cent," said Neilson.
"Probably what is more likely to win support is to keep the $1000 sign-on incentive, but abolish the $521 annual tax credit, which would be enough to bring the 17.5 per cent PIE tax rate down to 8 per cent."
It may be a good idea. In someone's early years in KiwiSaver, the $521 tax credit is a big boost to their account each year. But once their balance is more than, say, $100,000, the tax credit doesn't make much difference percentage-wise, whereas a lower tax rate on the considerable annual earnings would be most welcome.
Where does all this leave you, our correspondent? In KiwiSaver, I hope. Tax is one consideration. But another is the Government incentives (or the tax reductions that Neilson would like to trade for them). They make KiwiSaver really hard to beat, even when compared with rental property. And if you're an employee, you get a further bonus in the form of employer contributions. It's a pity to miss out.
Split mortgage repayments
Q: Could you please help me with your advice about paying the mortgage by taking small chunks of the whole amount, putting more money on that and paying the interest only on the rest?
A: It took me a few moments to work out what you're getting at here. But I think I've got it, and it's a good point.
Last week I wrote that it's often wise to split your mortgage so that part is at a floating rate, part is at a fixed rate for one or two years, and part is at a fixed rate for five years.
You can pay off the floating portion without penalty if you get a windfall, and you have some certainty about payments with the fixed portion. And as interest rates change, you'll be happy with at least part of your total loan.
I assume you're thinking of doing a split like that, then concentrating repayments on whichever portion of the loan is charging the highest interest. That's always a good tactic, which can be extended to include credit cards or any other debt. Attack the most expensive loans first.
I doubt if all lenders would let you pay interest only on the lower-interest portions. But it can't hurt to ask. Even if they won't allow that, and you have to repay principal as well as interest on all portions, you should always put any extra payments towards the highest-interest loan.
Grammar police brickbat
Q: Jeez, Mary, stick to your knitting. Don't correct a correspondent's grammar! Yes, you realised you were rude last week, so why not just think it rather than printing it.
A: Because I hoped it would be helpful.
It's a bit like when I insist that uni students put a greeting on their emails to me, even though many young people apparently don't bother when emailing one another. I tell the students that if they don't start with "Dear" or "Hi" or - if they must - "Hey", they'll alienate the oldies when they go out into the work force.
Similarly, people who use bad grammar make a poor impression on many of us old fogies and perhaps even some young fogies. Does that matter? It might if they want an opportunity or a job.
At least some people appreciate a bit of help with their grammar. Read on.
Grammar police bouquet
Q: Last Saturday when I read "Me and my wife", a number of thoughts raced through my head: "Oh this poor person isn't familiar with the correct grammar." And "Will Mary comment?"
Unfortunately many people don't have the benefit of our good secondary and tertiary education, or they choose to opt out of the education system. Although it was awkward, I think you did the right thing for the person, the New Zealand Herald, the public and yourself.
While at school and university my best friend occasionally corrected my grammar and I have always been grateful for his input.
A: For me it wasn't a mate but my mother. And I must say there were times when I was talking 10 to the dozen, telling Mum about some exciting new project, and I wasn't thrilled when her response was, "Different from, not different to". But it's stood me in good stead.
Praise from a teacher ...
Q: As a former English teacher I despair at the current level of accuracy in the use of punctuation and English grammar. Therefore, I was delighted to see the correction you made in Saturday's Herald to the writer who referred to "Me and my wife". This usage is truly awful.
The problem lies with changes in English teaching many years ago, which dictated that grammar teaching was no longer to happen. It was seen as too prescriptive. The result of this and the decline in foreign language teaching is the poor standard of understanding that younger people have of how the language functions.
Keep it up!
A: Thanks. And also to others who wrote in similar vein. I can't resist including just one more letter.
...and from a mum
Q: I think you are wonderful, correcting your correspondent's grammar.
I wonder what is taught in schools these days.
I am elderly now, my son looks after my finances, but I love reading your column. I hope that you keep on for many years yet.
A: And I think you are wonderful for writing such an encouraging letter.
Now back to my knitting - another thing Mum taught me.
• 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.