I have health issues that mean I can't work, and he has just been made redundant, so our situation is quite stressful and very tight. We need the KiwiSaver money to help us get through until he has a new job, and to assist us to get on top of all our debt (we have numerous loans, credit cards and store cards, which we could afford to service on two incomes, but we are struggling to meet even minimum living costs on one).
My question is: what should we prioritise with the KiwiSaver money? I could potentially get up to $24,000 paid out, although this is only about half of the debt we owe. Do we pay some debt off completely? If so, which ones? Or are we better to hold on to the money and just keep up with regular future payments? We want to make the money work for us as best we can.
Tough times for your family. But thank goodness you've got the KiwiSaver money - assuming you're allowed to withdraw it. Having an emergency fund is one of the less frequently mentioned advantages of KiwiSaver — although everyone should note that you can't withdraw money unless you're in a seriously bad way. It's a safety net for the big falls only.
The best way to use your money is to repay the highest-interest debt in full first, then the second-highest in full, and so on. Keeping the money in a bank account that pays just a few per cent after tax while you're paying out maybe 15 or 20 per cent on your debt will take you backwards.
I suggest, though, that in the short term you set aside in a bank account what you'll need for living expenses until your partner finds new work. And allow for that to take a few months, just in case. Once he has a new income, you can get straight into knocking off those horrid debts — and keep at them until they're all zero.
From then on, please don't run up more debt than you can repay in full every time the card bills come in — even if you're both earning heaps. If you save for items before buying, you make interest your friend rather than your enemy. You'll end up able to buy a lot more in your lifetimes, and you'll avoid the stress and worry you face now.
Kitchen or mortgage?
Q: I have a property that I live in and I hope to pay the mortgage off in 18 months. I also have savings that match what I owe on the mortgage. I am wanting to get a new kitchen. However, I am also looking at renting my property in about 12 months.
My questions are, do I:
• Get the kitchen and continue paying off my mortgage? This will leave me with some savings.
• Pay off the mortgage now (and have no savings) and save up for the kitchen?
• Keep my savings and continue with the mortgage payments and forget about the kitchen (the current kitchen is okay for renting for the next few years)?
A: I suggest you put the kitchen on hold until after you've rented out the property - or decided not to do that. A new kitchen is not essential and it clutters up your decision-making.
Then use most of your savings to pay off the mortgage — keeping a little aside for emergencies.
Why? Just as in the Q&A above, unless your savings are earning a higher after-tax return than the interest you're paying on your mortgage — which won't be the case unless you're in a pretty risky investment — you'll get more mileage from your money by getting rid of the mortgage as soon as possible.
Tax on KiwiSaver ...
Q: I just noticed this comment re KiwiSaver below your column online: "Also the tax paid on your KiwiSaver returns does not need to be included in your IR3 year-end balance up, whereas tax deducted on your bank term deposit needs to be included in your IR3. KiwiSaver returns seem to be exempt from your overall personal income total for the year including salary, interest, rent, etc."
Surely this is not the case, and any returns from KiwiSaver must be seen as personal income?
A: The person who made the comment is partly right but mostly wrong.
It's correct that you don't need to mention KiwiSaver on your tax return. And for the many people who don't have to file a tax return, the fact that they're in KiwiSaver doesn't change that.
But she or he is wrong to imply that KiwiSaver returns are tax-exempt. When you join KiwiSaver, your provider helps you work out what tax rate applies to you - taking into account your other income. The provider then takes tax out of your KiwiSaver returns and sends it directly to Inland Revenue.
In your provider's regular reports to you, they should include how much tax you've paid — just for your info. They should also regularly check that your tax rate — called your PIR — is still correct.
Because KiwiSaver funds are PIEs (portfolio investment entities), the tax is usually lower than on other income. But - even though you don't have to worry about tax on KiwiSaver — it's certainly paid.
... after turning 65 ...
Q: I turn 65 in December and intend to withdraw and spend the $20,000 I have in KiwiSaver on a new car. I contribute $20 a week to the fund.
Is there any value in continuing regular contributions after the end of June this year when the Government's $521 comes through? Will I get another Government contribution next year if I do?
A: Firstly, have you been in KiwiSaver for at least five years? If not, you will continue to receive tax credits until the fifth anniversary of your joining, and you can't withdraw your money until then.
But assuming you have been in the scheme for more than five years, you'll get a tax credit for the KiwiSaver year starting July 1, 2014 but it will be smaller - proportionate to how much of the July-June year you are under 65.
Let's say you turn 65 on December 15. Add up the number of days from July 1 to the day before your birthday. That comes to 167. So your maximum tax credit will be 167/365 of the standard $521 maximum, which is $238.38.
As usual, you have to contribute at least $1 for every 50c of tax credit. So you'll need to contribute at least $476.75. But you don't have to deposit all of that before your birthday, says Inland Revenue. It can be contributed any time up until June 30 next year.
One more point: I suggest you don't withdraw all your money, as that will automatically close your account and you can't reopen it after 65. If you leave a small amount in there, that keeps your options open for the future.
For the benefit of others, similar calculations are made if — during a July-June KiwiSaver year — you:
• Turn 18, the age at which the tax credit starts.
• Join KiwiSaver and are older than 18.
• Reach the fifth anniversary of joining KiwiSaver after your 65th birthday.
In all these situations, your maximum tax credit at the end of that KiwiSaver year is proportionate to how much of the year you were eligible for the credit. And in all cases, your contributions in the whole of the July-June year are counted.
... high risk profile ...
Q: I enjoyed your recent comments on KiwiSaver for people around retirement age.
I took a slightly different approach to KiwiSaver when I first joined six years ago. I took a much higher risk profile on the basis that the Government was putting in half (in those days) and my contribution was the same. I am self-employed, paying the minimum to get the maximum Government contribution.
My investment was in 50 per cent growth and 50 per cent balanced funds. The first two to three years was a bit of a nail-biting exercise, but the past two years I've had returns of 9.7 per cent for the balanced fund and 14.3 per cent for the growth fund overall (after tax and fees), so I am feeling much better about the scheme.
I see no reason to withdraw funds while the returns are much better than term deposit rates.
My 65th birthday was last August, so do I get a proportion of the last $521 Government contribution, and when?
A: Your question is largely answered above. You'll get a small tax credit, for last July and part of August. You should receive it around August or September this year.
It sounds as if you thought, when choosing your risk level, that you might as well take some risk with the Government's tax credit, which you wouldn't have received if you weren't in KiwiSaver. That's good thinking for people able to stomach bad years — which you've proven you can do.
Now's the time, though, to think about when you expect to spend the money. If it's within the next few years, you might want to move to a lower-risk fund to avoid the chance of your balance slumping right before you want to withdraw it.
... and when to stop
Q: Having just received my KiwiSaver statement, as I am 67 I find I no longer receive the Government top-up. I consider this to be age discrimination. Am I correct?
Secondly, as I no longer receive this top-up is it worth my continuing to contribute? I still work and put in 4 per cent and my employer 2 per cent. I am in a cash fund and have $32,000 invested.
A: Yes, it is age discrimination. But so is paying NZ Super only to people 65 and over. It's a pretty good trade-off!
On your second question, I would keep contributing for as long as your employer is willing to contribute. It's like free money, and no longer getting tax credits means you can withdraw your and your employer's contributions whenever you want to.
Once you stop work, it will probably be a toss up as to whether a cash KiwiSaver fund gives higher returns than bank term deposits. In some periods one will, in some the other will.
• 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 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 email@example.com 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.