Planning your financial future can sometimes be like playing Monopoly. There are all sorts of financial surprises awaiting you depending on the throw of a dice.
I come across nasty shockers from time to time that can have huge financial consequences for people.
Some should be obvious, such as the pittance you will have to survive on if you lose your job or go on New Zealand Superannuation without any other income. Another is that bank deposits aren't government-guaranteed as they are in other countries such as Britain.
Others come out of the blue. In February a reader emailed me because he'd been taxed $4000 on a managed fund investment with his bank, even though the fund had dropped in value and no dividends had been paid. "How can I be up for almost $4K tax when there was no income and the investment loss was $6K?" he asked.
The answer was in part that 48 per cent of his $190,000 fund was invested outside Australasia, which meant it was hit with a special foreign investment fund tax. It is a type of wealth tax that is charged annually on the value of the investment, not the income from it. For more information go to: ird.govt.nz/toii/fif/
One common shock, says Susanna Stuart, financial adviser at Stuart+Carlyon, is what happens when a partner dies without leaving a will. They don't inherit everything if the deceased has direct descendants, says Stuart. They get the chattels, $121,500 of the estate and a third share of the remaining property. The rest goes to direct descendants. That can result in the forced sale of the family home or other assets.
Just because something is called an "investment" doesn't mean it's regulated by the Financial Markets Authority or other government body. The word "investment" can be used by people touting all sorts of risky ventures, such as gold bullion and other commodity "investments", market trading software, gambling schemes and racing syndicates.
People touting unregulated investments don't need to have minimum levels of training, belong to the Financial Service Providers Register or a dispute resolution scheme. There are few comebacks if things go wrong, which they often do.
Another one that catches people is that superannuation/investment plans organised before 1995 may attract prohibitive cancellation penalties. Steve Morris, financial adviser at SW Morris Associates, says advisers who organised these plans were paid up to 150 per cent commission on the first year's contribution. If the plans are broken before maturity the commissions can be clawed back from the investor, along with a variety of charges. Even if the investments are poor value, paying the premiums until maturity may be the lesser of two evils.
I could have written this entire column about insurance shockers. Here are just a few.
* You don't need to be convicted of drink-driving to have your insurance claim declined. Even if you pass a breath or blood test hours after an accident, insurers can use experts to determine what the driver's alcohol level would have been at the time of the accident and, thus, decline a claim.
* Your travel insurance doesn't cover you for medical tourism. That includes going overseas to have dental work such as a root canal.
* Insurance policies are not all created equal. As Morris points out, policy wordings can vary greatly and you may not know until some dreadful event befalls you. Beware of apparently cheap life or trauma (also called critical illness) insurance. These policies may be cheap, but may cover only a handful of defined "trauma" conditions, whereas other policies cover up to 35 conditions, says Morris. Likewise, good life insurance policies will pay out 12 months before you die of a terminal illness. Cheap cover may only pay if you're given six months to live.
* A little "white lie" or exaggeration about one aspect of your insurance claim entitles the insurance company to decline the entire claim, not just the bit you made up. Insurance policies are based on the doctrine of "utmost good faith". If you breach that in any way the contract is not valid.
Another area with lots of "gotchas" is property investment, sometimes including your own home. It isn't always "as safe as houses". For example:
* You may be hanging on by the skin of your teeth paying the mortgage. This may not save you. Failing to pay rates can also lead to a mortgagee sale or your house or investment property.
* If you have more than one mortgage with the same bank and you fall behind in payments, the bank can choose which property to send to a mortgagee sale - even if it's your own home. The moral is to spread your mortgages and other debt around more than one lender.
* If you're related to a builder, property developer or trader you'll pay income tax on your capital gains on investment property. It sounds far-fetched, but it's true. Under the Inland Revenue Department's "associated persons" rules, innocent investors can become tainted by association with builders and developers and are charged tax on the gains on a property when it is sold. You become tainted under the rules if you are associated by birth, marriage or business.
The contracts people sign willy-nilly with banks and other lenders, such as hire purchase providers, are often full of nasty little shockers. For example, secured debts are not cleared by bankruptcy or the No Asset Procedure, says the New Zealand Federation of Family Budgeting. This is one shock budget advisory clients get. Likewise, bankruptcy does not clear all fines, court-ordered reparation, Work and Income benefit debts and child support.
Another catch, according to the federation, is that people who apply to clear their debts through the No Asset Procedure or bankruptcy may lose their KiwiSaver funds, which are applied to their debts.
If you're married or in a de-facto relationship of three years or more, debts become joint debts even if your finances are separate. That includes both business debts guaranteed by one partner and personal debts. It's no use saying "it wasn't mine".
When it comes to superannuation and other government benefits there can be some real surprises, especially for people who are new to benefits:
* The IRD and Work and Income define income differently. You may be able to tuck certain income away from the tax man legitimately, but Work and Income has its own income definition. I mentioned this a few weeks ago in relation to gifting. The IRD will let you gift all your assets in one go to a trust, but Work and Income still only counts $27,000 of gifting a year. The rest it considers still yours.
* You could work your entire life in New Zealand and not qualify for NZ Super. If your spouse or partner qualifies for an overseas state social security benefit or pension it will be deducted from his or her NZ Super and sometimes a Kiwi spouse's NZ Super. Websites such as NZPensionprotest.com outline why they believe this rule is unfair. In many cases the superannuitants involved contributed to those overseas pensions, but are not entitled to receive them as well as NZ Super in the way that Kiwis get KiwiSaver over and above NZ Super. There is information about this on Work and Income's website, which can be found by following this link: tinyurl.com/superandpensions
* You must live in New Zealand for at least five years from age 50 to 65 to qualify for NZ Super. This isn't the time of your life to be taking an extended OE. Nor can people expect to get NZ Super if they lived and worked overseas for their entire working lives.
ACC claimants get 80 per cent of their previous year's earnings declared to the IRD. That catches out a lot of self-employed people who, on paper, earn far less than they could actually live on. These people can pay for ACC CoverPlus Extra, which enables them to negotiate a fixed level of lost earnings cover.