I am a 36-year-old widow on $50,000 a year. I have a student loan and no other debt, and $6000 saved up. My daughter is 8 years old, and I would like to own my own house in an area with a good college in five years' time.
It sounds impossible. But there must be a way.
I have around $3000 in KiwiSaver, but I stopped contributing in 2013. Instead I am contributing 5 per cent from my salary to a superannuation fund managed by Mercer. My employer contributes 10 per cent.
As I am illiterate in financial matters, how can I get up to speed with making money work for me? Your opinion would be greatly appreciated.
You're too tough on yourself. You're in a much better financial situation than many:
• You've got no debt other than a student loan. And given that it's interest-free, you might as well pay it off as slowly as possible.
• You're taking part in a super scheme in which your employer makes a generous contribution. Many people on $50,000 would say they couldn't afford to put in 5 per cent of their pay, but not you.
• You've made a great first step: setting a specific goal, with a time frame.
So where to from here? If you live in Auckland, you're obviously going to have to settle for a modest home or apartment in a cheaper area.
That might not put your daughter into one of the "top" schools, but there are many other schools that offer a good education.
When it comes time to buy a home, at your young age you can go for a long-term mortgage - say 30 or even 35 years - to keep the repayments down. Later on, when you're better off, you can reduce the mortgage term.
Most people earn more as they get older, and spend less as their children leave home, and it's safe to assume you will too.
But your priority right now is to get as big a deposit as you can.
I can understand why you switched from contributing to KiwiSaver to your work super scheme, with its generous employer contributions. And it's possible that scheme offers help for people buying a first home, so ask about that first.
However, if it doesn't, it would be good to get you back into contributing to KiwiSaver - especially if you can also switch the 10 per cent employer contributions into KiwiSaver.
KiwiSaver is generally the best way to save for a first home. After at least three years in the scheme, you can withdraw not only your savings but also employer contributions and - as of this past week - the Government's tax credits.
Also, you may qualify for a subsidy - now called a KiwiSaver HomeStart grant - of up to $5000, or $10,000 if you buy a newly built home.
To get this, you must have contributed specified minimum amounts for at least three years, earn up to $80,000 (or $120,000 for two or more home buyers), and buy a home worth up to $550,000 in Auckland, or $350,000 or $450,000 elsewhere.
For more on this see www.kiwisaver-homestart.co.nz.
How might you move the 10 per cent employer contributions into KiwiSaver? This will probably depend on whether those contributions are "fully vested", says Michael Littlewood, a superannuation expert with the University of Auckland's Retirement Policy and Research Centre.
By "vested", he means you keep the money even if you leave the job.
"If the 10 per cent is fully vested from day one, the employer should be indifferent to paying it all into KiwiSaver, where your reader can access it after the five years for the home," says Littlewood.
"If that's the case she should ask the employer if that's possible. Perhaps she should say that it will be only for the five years needed to get the deposit together."
However, "If the employer's subsidy is not fully vested (if she were to leave service she would receive only a proportion of the employer's contributions), the employer will be less willing to co-operate.
"It may listen to a suggestion to transfer any vested employer contributions to her KiwiSaver account on some basis so that she can build up the deposit."
Lump sums can be deposited in KiwiSaver at any time.
What about your own contributions if your super scheme doesn't have full vesting?
"Again the employer might be willing to treat her KiwiSaver contributions as counting as member contributions to the employer's scheme (and so qualify for the employer subsidy)," says Littlewood.
If your employer isn't co-operative, you have two choices:
• Switch your contributions to KiwiSaver and settle for the employer's compulsory 3 per cent contributions to that scheme. If getting a home is your top priority, this makes sense.
• Keep contributing to the employer's scheme, so you don't lose their 10 per cent contributions. But also try to contribute at least $20 a week directly to your KiwiSaver provider, which will give you the $1043 annual total to collect the maximum tax credit. It will all help for your home deposit. If you expect to be with the employer for a long time, this may be your better choice in the long term, as those 10 per cent contributions will add up.
Confused? Littlewood and I recommend you discuss all this with your employer - perhaps taking this Q&A with you.
"As long as the employer can see that its employee benefit objectives are being achieved (that's why it has a generous scheme), and that the employee's personal objectives can also be met, the agreement could make both happy. Having happy employees is one reason why the employer has the current scheme," says Littlewood.
Two more points:
• You're contributing 5 per cent of your pay to the work super scheme, but in KiwiSaver you can contribute only 3, 4 or 8 per cent straight from your pay. If you switch to KiwiSaver you could go with 4 per cent, and then set up an automatic payment of a further 1 per cent - more if you can manage it - directly to the provider every payday. The provider should help you set that up.
• The www.kiwisaver-homestart.co.nz website includes info on Welcome Home Loans and FirstHome, which may also be helpful for you. With Welcome Home Loans you can get a mortgage with just a 10 per cent deposit, as opposed to the usual 20 per cent. And FirstHome gives you a deposit of 10 per cent, up to $20,000, to buy a vacant state house. Most of these houses are in provincial areas.
Good luck. You clearly have determination, and that probably matters more than anything else.
Teaching kids to save
Here is another take on helping your kids. When our three kids started work, from day one instead of charging board, we had them open a Home Ownership Account with a bank and they paid their "board money" into that.
After the first year, that amount went up a bit and they also started paying Mum a bit. By the third year, it was about 50-50 to their account and to Mum and by this time it was getting near real board.
At one stage our eldest son borrowed money from his account to buy a car, and paid it back to himself with "interest".
Hopefully our scheme taught them the savings ethic as well as giving them a deposit for their first section. We worked on the theory that what we hadn't had, we didn't miss, as far as their money was concerned. It worked remarkably well for them and us.
Sounds like a great idea.
It would be good to do this with KiwiSaver accounts if the kids are aiming at home ownership. They wouldn't be able to borrow for cars but - as explained above - being in KiwiSaver helps people get into the housing market in several ways.
For one thing, once the young ones reach 18 they are eligible for KiwiSaver tax credits, so for every dollar they put in they get 50c from the Government, up to a maximum tax credit of $521 a year. And that money can now go into a first-home deposit.
Tax and tertiary fees
Last week's Q&A about the deductibility of tertiary fees is interesting for two reasons:
• It seems that the asker does not have their own tax adviser (otherwise, why ask you?). But their child is in a business making $40,000 a year. This begs the question of whether tax was properly accounted on these earnings.
• There is not enough information in the query for the IRD or anyone else to give a proper answer on tax deductibility of tertiary fees (that is, whether the private limitation applies or not).
On your first point, it would be good to think a student savvy enough to run such a successful business could file his own correct tax return. There's heaps of info on www.ird.govt.nz. But who knows?
On your second point, Inland Revenue says you're probably right. I note that you're an accountant and tax agent, so you probably know about all sorts of unusual situations.
For the information of others, the private limitation applies when "a person is denied a deduction for an amount of expenditure or loss to the extent to which it is of a private or domestic nature," according to the Income Tax Act 2007.
Fees for employees
Your Q&A last week about tertiary fees related to a sole trader. Does the same response also relate to a limited company or other entity?
Many companies (and even government departments) pay the costs of training/qualifications for their employees.
These may include but are not limited to health and safety, first aid, forklift licences, management and accounting qualifications.
How many accountants out there who have had their qualifications paid for by IRD while they were employees of the department?
My understanding, and I may be wrong, is that the costs of these are tax-deductible as they are crucial and essential to the operation of the business, even though the accreditation or qualification is in the name of the employee.
The response will be interesting.
Says an Inland Revenue spokesman, "If there were an arrangement under which a company paid the tertiary fees of an employee (or perhaps a shareholder/employee) then, although the company may be able to claim a deduction for those fees, the arrangement would also amount to income for the employee (that is, expenditure on account of an employee).
"This means the sum paid for the fees must be treated as if it were part of the employee's overall salary package.
"Tax would also have to be deducted by the employer from the gross amount required to pay the fees, just as they would for salary and wages."
• 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.
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