Mary Holm: KiwiSaver changes good but not perfect

While the system may not be perfect, now New Zealand's over-65s can look forward being welcomed into KiwiSaver. Photo / 123RF

COMMENT:

I'm the teacher in full employment at a state high school who wrote to you a while back about having his KiwiSaver employer contributions cut — without notification — by the Ministry of Education when he turned 65.

I see significant changes to KiwiSaver are before Parliament in the form of a bill to change the law. Great work Mary, and I'm certain you played a big part in influencing the Government, although the retirement agency is claiming the kudos.

However, nowhere can I see exactly that us over 65s will actually get the employer's 3 per cent contribution paid to us. And will it automatically restart into my KiwiSaver account, etc?

Sorry to disappoint you, but the proposed changes won't do what you hope — although they will be welcomed by many over-65s who are not in KiwiSaver.

Nor can I claim any credit — although I do appreciate what you say. The proposals are based on recommendations made in Retirement Commissioner Diane Maxwell's 2016 review of retirement income policies, so she is totally justified in taking credit.

Here are the proposed changes included in the bill, and some comments on them:

• From 1 April 2019, members could contribute 6 or 10 per cent of their pay, in addition to the current 3, 4 or 8 per cent.

The 10 per cent worries me a bit. That's a lot of money to tie up for many years. It might be better to make extra savings where the money stays accessible.

I would also like to see a "small steps" option for low-income people.

They could start out contributing 1 per cent, rising to 1.25 per cent after six months, then 1.5 per cent after a year, and so on, up to 3 per cent. A person working a 40-hour week on the minimum wage would contribute just $6.60 a week at the start.

• The maximum contributions holiday period would drop from five years to one year. This would apply to applications made after April 1, 2019.

With 84 per cent of those currently on contributions holidays choosing five-year "holidays", I like this change. Most people don't need that long a break, during which they'll get out of the saving habit.

• The name "contributions holiday" would change to "savings suspension".

It's hard to argue with that — "holiday" is too nice a word.

• From July 1, 2019, people over 65 could join KiwiSaver, giving them access to managed funds that usually have lower fees than non-KiwiSaver funds.

They would be able to join their peers who got into KiwiSaver before they turned 65.

That's great. However — and this is the bit that applies to our correspondent — from July next year the tax credit and compulsory employer contributions would stop at 65 for everyone, regardless of when they joined the scheme.

• The five-year lock-in period for people who join KiwiSaver between 60 and 65 would no longer apply from July 1, 2019. They could withdraw their money at NZ Super age, just like everyone else.

Note, though, that anyone aged 60 to 64 who joins before July next year would remain locked in for five years, and would get tax credits and compulsory employer contributions for five years. That's something to weigh up. People in that age group who are not in KiwiSaver should consider joining within the next year so they get those incentives for longer.

Says the Government's commentary on the bill: "The purpose of the lock-in period was to prevent people in the 60-65 age bracket from joining KiwiSaver to receive the $1000 kick-start payment and then withdrawing their funds soon after. As the kick-start was repealed as part of Budget 2015, the lock-in period is no longer necessary." Makes sense.

The commentary adds: "Allowing over 65-year-olds to opt-in to KiwiSaver provides a further catalyst for removing the lock-in period, as those over 65 joining KiwiSaver may require access to their funds within the first five years of joining (such as if they become unable to support themselves through paid employment, or to address age-related needs).

Assuming the bill becomes law — which seems likely although there could be some modifications — all you 65-pluses who write to complain that there's too much on KiwiSaver in this column can become part of the club.

Age no barrier

I was very surprised at your first "rule" for investing in shares last week: "Use money you don't plan to spend for at least 10 years. That gives enough time for recovery from market downturns."

Maybe it was a bit tongue in cheek. What does an 80-year-old do with his investments? Surely not term deposits or similar, particularly if he or she has been investing in shares and share funds for the past 50 years?

No tongues in any cheeks. My advice to anyone, including 80-year-olds, is if it's money you expect to spend in the next two or three years, put it in a cash fund or term deposits.

For three-10-year-money, use bonds, a bond fund or a balanced fund. For spending money a decade or more from now, by all means leave it in shares.

But perhaps you're an exception. If you have enough savings that it wouldn't bother you if your spending money plummets — and you enjoy the risks of share investing — go for it.

Complex comparison

I feel your response last week to the gentleman questioning the relative performance of shares and residential property was very misleading on one count at least, and potentially two.

First, to dismiss the effect of rent (the equivalent of dividends for shares) in the comparison of indexes will skew the results significantly. The fact many landlords are geared and face interest and other costs is irrelevant. And, of course, sharemarket investors might also be geared.

If you did this properly and made some assumption around compounding the rental return, as the NZX50 does for dividends — even if you did it at bank deposit rates — I am sure you would get a different answer.

Second, your QV Quarterly House Price Index is also, I presume, a New Zealand one, while it is more than likely that your correspondent is an Aucklander and invested in Auckland or its environs (the sum invested suggests this), which will again make a material difference.

Mea culpa — to some extent — on your first point, but not on your second.

I said last week: "It's true that the house price index doesn't include rent, but for many landlords that's offset by mortgage interest and other expenses."

That was oversimplifying it. The shares versus property question is complex. This is largely because people who invest in rentals nearly always borrow to invest — otherwise known as gearing. As you say, share investors might also gear, but far fewer do.

I disagree that gearing is irrelevant. It makes a huge difference to investments — raising both risk and returns. If all goes well, geared investors get gains not only on their own money but also on the bank's money.

They pay interest for the privilege, but hopefully their long-term gains exceed the interest paid.

However, if a geared investor is forced to sell when prices have fallen, they can end up with no investment and still owing the bank money.

It does happen. Says another reader who wrote about this issue: "The present low interest rate environment and high demand for rentals means that if/when there is to be either a steep rise in mortgage interest rates or a crash, the reduction in realisable values will be considerable and the suffering will be very bad.

"I remember that by 1989 mortgagee sales were extremely numerous. That forced already low property prices into the pits."

But how do you show the effect of gearing in a graph? Some investors are heavily geared, others not at all. And what interest rate do you use?

That's just the start. What about rents? We could get data on average rents, but how much should we deduct for all the highly-variable expenses property investors face — insurance, rates, maintenance, water, accounting and property management?

A reader, who was making much the same point as you, had a go at taking this into account. He concluded: "Where it is pointing is that rent will add a quarter again to the capital gains, post tax."

Good on him, but his assumptions could easily be challenged.

This complexity is partly why I said, last week: "I don't want to reopen the shares versus rentals debate. We've had enough of that lately."

The main point of the Q&A was that the reader's wife was wrong to say the sharemarket has underperformed. As the graph should have shown, the share index has more than doubled since the end of 2007, while the house price index has almost doubled.

(Unfortunately, there was an error in the graph. The top line should have been labelled 2000, not 1500).

Still, I should have made the point more forcefully that the graph excluded net rental income.

Your second issue is that the house price index covers the whole country. But, because the reader's rental property has risen 26 per cent — from $720,000 to $906,000 — since August 2016, you assume it's in Auckland.

First, it could also be in Wellington, Hamilton, Tauranga or Queenstown, where prices like that aren't uncommon.

And given that Auckland house values rose just 5.5 per cent in that period, while in Queenstown they rose 24 per cent, in Wellington 17.2 per cent, in Tauranga 10.6 per cent, and in Hamilton 6.8 per cent, the house might well have been outside Auckland.

Regardless of where the house is, the reader has been lucky to get such a rapid price rise.

History tells us that extreme price rises or falls don't continue — and in fact often reverse. I think it was better to put his experience into perspective by considering what has happened to a broad index.

Cutting taxes

I spent 40 years working as an accountant in the "tax" industry. The capital (not taxable) versus revenue (taxable) distinction is obviously essential for clients to keep their tax bill as low as legally possible. And herein lies the most complicated area of tax law.

Governments have introduced masses of rules attempting to capture "capital" income as taxable. This complexity is gravy for accountants.

Introducing a new capital gains tax would bring mind-boggling complexity alongside the existing complexity. My colleagues will be drooling in anticipation.

I have always thought it simpler to just remove the capital/revenue distinction for business (which would capture everything except an individual's personal matters).

I can hear the screams of anguish.

But remember you only pay the income tax after you have made the profit. So you have the cash. Where there is a need to sell a building, for example, and buy a bigger one, there could be a grandfathering facility.

I have outlined this to colleagues. Their response: "Horrors. You would put us out of work."

If your colleagues did lose their jobs, perhaps they could then work at something that contributes to everyone's wellbeing. Figuring out how to cut clients' taxes — which arguably reduces wellbeing because there's less money for social services — is such a waste of good brains.

- Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a 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. 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 mary@maryholm.com or Money Column, Private Bag 92198 Victoria St West, Auckland 1142. 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.