Mary Holm: Helping students to get ahead

Teaching a son or daughter to drive a car is providing a valuable life skill. Photo / Thinkstock

Last week a reader asked what is a reasonable allowance for a first-year university student.

My son is in his second year and I don't give him any financial support apart from paying for doctor, dentist and driver licence test and lessons (birthday and Christmas presents). He is allowed to use my car and petrol.

He has a job on Sunday afternoons, which gives him enough spending money, and he works extra hours over the holidays to save for a car and towards paying back the student loan for uni fees.

He receives a yearly amount from a savings scheme that his grandparents paid for when he joined as a baby.

When speaking to friends and family, he seems proud that he is working and not receiving handouts from parents. He is learning the value of money and about working with others and the public. This will also be of benefit when applying for jobs after finishing his degree.

I could give him pocket money, but I would be doing him no favours and taking away the incentive to work and gain important life skills.

Your son might be learning more by living than he does by studying - although both matter, of course.

Good on you for covering your son's medical expenses. We don't want students' health being compromised. And good on you, too, for encouraging him to work. There's nothing like labouring in a boring low-paid job to inspire study that should lead to more interesting work.

The only trouble is that it's not always easy to get a job, although going through that struggle is probably also useful experience.

Several other readers wrote in about this. More next week.

Bank options

I have a suggestion for the person with the difficulties around the revolving credit mortgage. You appear to overlook the option of an Offset, in the Kiwibank parlance, or Total Money, in the BNZ vernacular, mortgage solution.

This would give immediate visibility as to how his/her account balances sit. With these products you can have a number of separate accounts linked to your mortgage so that you are only charged interest on your net debt balance. The only drawbacks in comparison with a revolving credit facility are:

* Potentially increased fees; for example, with our Kiwibank Offset mortgage we are charged $10 a month as opposed to no fees for a revolving facility.

* Decreased flexibility with repayments; for example, we make fixed monthly contributions. However, this really just means we are paying more off the principal and so will end up paying the mortgage back sooner.

The decrease in flexibility may actually be good for people who need a bit more discipline to make sure they are "chipping away" at the principal.

Thanks to you and others who wrote about Offset and Total Money.

As one reader put it: "You effectively achieve a revolving credit arrangement but minimise the risk/temptation of dipping into tax money. You also gain the discipline of steadily paying off the mortgage in a clear and obvious manner, unlike the hotchpotch of a revolving credit.

"The only real restriction is that generally all the accounts have to be in the same account name; that is, business accounts cannot normally be linked with personal accounts."

Another reader pointed out that: "This option is also very good for people who receive redundancy payments and are not sure how long it will take to get another job. If the funds sit in a pooled account offsetting a mortgage it has the same effect as repaying some of the mortgage (that is, reducing the interest charge each month), yet the funds remain available should they be needed."

However, there are drawbacks, as you point out. It's possible that higher fees could cancel out what you gain, especially if you don't tend to have large balances in your accounts. And flexibility in mortgage repayments could be important for people with uneven income.

Another drawback for last week's reader is that she would have to switch mortgages, which may not be easy.

Some readers wrote about other options - setting up accounting systems or spreadsheets. Thanks for the detail you all went into, but I think it's better for each person to develop their own system, or ask an accountant to help them. Read on.

Accounting offer

I am a business services partner at a large accounting firm.

I was reading the letter from the self-employed person who has a revolving credit facility. I was shocked to hear that their accountant couldn't/wouldn't help them with a system to manage their tax payments, savings, etc.

I would be happy to meet or talk to the person at no cost to work out a system that would suit them. If you think this is appropriate I am happy for you to pass on my details.

That's kind of you - and can't do any harm to the reputation of accountants! I have forwarded your offer to the reader.

Super means-testing

I am a bit confused about your response last week to "Cash cut from Super". I understand about KiwiSaver being involved in means-testing if the person cashed her KiwiSaver and was under 65 and getting NZ Super with her partner. It sounds as if once she turns 65 and cashes in on KiwiSaver, she is still means-tested.

My partner, who is on NZ Superannuation, has income from other sources and is not means-tested. I am not on Super, but will be entitled to it towards the end of the year when I turn 65.

I have been in KiwiSaver since it began. Does that mean when I turn 65 I will be means-tested? If so, would I be better pulling out of KiwiSaver now and putting the money into a private investment?

Sorry about your confusion. A Work and Income spokesman and I spent ages trying to make last week's Q&A clear, but it is complex. Here are some key points:

* Nobody can withdraw their KiwiSaver money before they turn 65 - unless it's because of circumstances such as serious illness or financial difficulties.

* So, in your first paragraph, it's not the under-65er who gets access to her KiwiSaver money, it's her over-65 partner. If the couple has chosen to "include" the under-65 spouse in their NZ Super - so that both spouses receive payments - those payments are means-tested, as explained last week. In the process, Work and Income looks at all income earned by either partner, including returns on accessible KiwiSaver money.

* Apart from this situation, NZ Super is not means-tested. Once both partners are over 65, each one will receive their full NZ Super payments. KiwiSaver has nothing to do with it.

In your case, you are not "included" in your partner's NZ Super. So you can go full steam ahead, getting full NZ Super from 65 and gaining access to your KiwiSaver money once you have been in the scheme for five years, or on your 65th birthday, whichever comes later.

This means that you don't need to pull out of KiwiSaver now, and you wouldn't be allowed to anyway. Even if you could, it wouldn't make any difference. When Work and Income does its means-testing, when an under-65 partner is included in NZ Super, it looks at income from all sources.

Vehicle conundrum

We are similar to the couple last week, with one partner under 65 and one over, both receiving NZ Super. We joined KiwiSaver with the object of purchasing a vehicle when the younger of us reaches 65.

If we withdraw the money and purchase a vehicle, leaving nothing invested, will the KiwiSaver total be treated as income for that financial year?

Alternately, if the money is left in a savings account while we find a suitable vehicle, will the interest be treated as income?

You're in the clear about buying the car, as long as you wait until the younger partner is 65. As stated above, you'll both receive full NZ Super then, regardless of income.

However, you may see a change before then, when the older partner gains access to KiwiSaver money. If the return earned on that money plus any other non-NZ Super income totals more than $100 a week, your NZ Super payments will decrease. This will happen until the younger partner reaches 65.

Out of interest, I asked Work and Income what would happen if you bought the car earlier, when the older partner first gets access to KiwiSaver.

"The department may consider that the clients have deprived themselves of income as they could have earned income on the lump sum. So the department may decide to charge a notional rate," the spokesman replied.

"For example, $20,000 withdrawn could earn an income of around the Reserve Bank average retail six-month term deposit rate."

At the current rate of 4.15 per cent, the notional income would be $830 a year. That could be included in the income test each year until the younger spouse turned 65 and became eligible for NZ Super.

Supper and shares

I am a little confused by your reply to "Cash Cut for Supper" last week.

You say: "What if your spouse put the KiwiSaver money into shares that don't pay dividends so there is no income generated?" What shares don't pay dividends? All my shares are in dividend reinvestment schemes, where possible, except for Contact Energy.

Oh no, not another confused reader. But this time it's easier to put you straight.

Quite a few shares don't pay dividends. Craigs Investment Partners came up with 31 New Zealand companies that never have or don't currently make the payments. They include: Allied Farmers, Fisher & Paykel Appliances, Heritage Gold, Metlifecare, PGG Wrightson, Rakon and many I haven't heard of. Internationally, Apple is a famous example of a non-payer of dividends.

Generally, companies don't pay dividends for one of two reasons. They have no or low profits from which to pay. Or they are growing, and want to reinvest all their profits in the company. Companies in that second group are often small and new, with shareholders happy to forgo dividends in the hope that the companies will thrive and their share prices soar.

By the way, I had a wee giggle at your typo, writing "Supper" instead of "Super". It sounds as if somebody is going hungry.

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 best-selling 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, 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.