Lending to a daughter and beating the bank interest rate is having cake and eating it too. Photo / Thinkstock
Q: We have two lovely daughters, in their late 40s and early 50s. Father is retired with $500,000 invested in the bank.
The eldest daughter and husband were borrowing $600,000 from the bank to invest in a block of commercial units.
One day, they had to renew the agreement with the bank, and I suggested, "Why don't you borrow my $500,000 and split the interest between what I get from my bank and the commercial interest you pay your bank?"
We both gain a bit - they have to pay less and I receive a bit more. So far so good.
The youngest daughter did some thinking and felt a bit left out.
If she was in the same situation, I was glad to give both of them half the $500,000. But she is not planning to borrow money from me or the bank.
After a good talk, the youngest daughter suggested that what gain the eldest made also had to be given to her.
My reply was that it was out of the question, because she would gain and father and eldest daughter were back to square one.
Mary, there is so much friction in the world and I don't want to create more. Looking forward to your reply with advice or suggestions.
A: There's a way you can all gain. You just have to cut up the pie slightly differently.
Let's say you're getting 4 per cent on your savings and your older daughter is paying 8 per cent on her loan. Under Plan A you lend to her at 6 per cent. Each of you gains by 2 percentage points.
But your younger daughter cries "unfair!", so you move to Plan B.
Under this plan, you charge the older daughter 7 per cent. Then you give 1 per cent of the loan to the younger daughter each year out of the interest you receive.
That means:
• The older daughter pays 7 per cent, instead of the 8 per cent she would otherwise be charged. She is 1 percentage point better off.
• The younger daughter receives 1 per cent of the loan - the same gain as her sister.
• You receive 7 per cent but then pay out 1 per cent, so you end up receiving 6 per cent - more than you get in the bank.
You're in the same position as under Plan A and your daughters have evenly divided their gain.
Your numbers will probably be more complicated, with decimal points. Just start with what you would charge the older daughter if you were using Plan A. Then charge her halfway between that and the rate she would have to pay a bank. We'll call her discount from the bank rate $x a year. Then give the younger daughter the same $x each year.
Everybody should be happy.
Q: I've put off writing this, mainly out of embarrassment at my ignorance. The fact is this embarrassment might have a financial value, and I can't afford to waste money.
About five years ago, I changed my position within my organisation. A short while later, I had a letter from IRD, approving my KiwiSaver contributions holiday. Since I hadn't applied for one, I wrote to IRD to say that. I didn't receive a reply. I paid no attention as my salary deductions carried on as usual, so I thought everything was working as before and that IRD just hadn't replied.
A couple of months ago, though, I had another letter from IRD, this time telling me that my five-year contributions holiday had come to an end. (What?) I called IRD and was told, during what seemed to me to be a "canned" explanation of the contributions holiday process, that my employer might have submitted a (something) form in error. Not to worry.
I'm curious. If IRD thought I'd stopped contributing, have I missed out on any government contributions? I'm 66 now, if that makes a difference, so I passed 65 while I was on "holiday". I don't think I missed any employer contributions, as they're built into my salary package.
A: It surprises me how many people don't check every now and then what money is going into their KiwiSaver account. Then again, some people don't even know who their provider is. (They can ring 0800 KIWISAVER to find out.)
Anyway, good on you for looking into the situation now.
You should have been receiving regular statements from your KiwiSaver provider that tell you who has contributed what, as well as investment returns, fees and taxes, and your closing balance. If you haven't been getting those, contact your provider.
Another source of information is through kiwisaver.govt.nz. Click on My KiwiSaver at the top right and sign up for the service. It will tell you all the transactions in your account that have gone through Inland Revenue - government, employee and employer contributions. It doesn't include money paid directly to a provider, but that hasn't applied to you.
The Government's tax credits would have stopped anyway when you turned 65 or five years after you joined KiwiSaver, whichever was later. Compulsory employer contributions would also stop then, but some employers are kind enough to keep contributing.
Given that anyone on a contributions holiday can still contribute if they wish, and still get tax credits, I would be surprised if you've missed out on anything - regardless of whether Inland Revenue thought you were on a contributions holiday. If you have missed out, discuss that with the IRD.
Q: My married daughter has debts against her which her husband has run up, but in both of their names. She has put her KiwiSaver on hold in the fear that a judge or anyone else could take this money away to pay the debts.
Please advise if this could happen. She is 44 years old.
A: Let's look first at a worst-case scenario - bankruptcy.
We'll assume that the debts are owed by your daughter and her husband, rather than a limited liability company they've set up.
If your daughter goes bankrupt, under current law her property - including her KiwiSaver account - would be "vested" in the Official Assignee (OA), says the Insolvency and Trustee Service.
"Any property acquired during bankruptcy also vests in the OA," says a spokesman for the Service.
"This means that a bankrupt's KiwiSaver fund accumulated up to the date of discharge from bankruptcy becomes, in layman's terms, the property of the OA.
"The OA then has a statutory duty to realise a bankrupt's property and distribute the proceeds to creditors." In this context, "realise" means turn into cash.
Note, though, that it was just last year that the High Court ruled that a bankrupt's KiwiSaver account is included in property that vests in the OA. "The High Court's decision has been appealed to the Court of Appeal, and a hearing is scheduled for March 18," says the spokesman. So it's possible that could change.
By comparison, savings or investments outside KiwiSaver could definitely be used by the OA to repay debts.
Taking a step back from the bankruptcy precipice, if your daughter owes money I don't see how anyone could force her to use her KiwiSaver savings to repay the debt.
However, under pressure from creditors, she might try to withdraw some of her KiwiSaver money in a financial hardship withdrawal.
She should note, though, that this is not an easy process, and is not always successful. But maybe the situation is not even that dire, in which case her sensible options are:
• Restarting her KiwiSaver contributions - so she benefits from government and perhaps employer contributions.
• Continuing with the KiwiSaver contributions holiday and instead using what would have been contributions to pay down the debts.
Which option is better will depend on her circumstances. To work through that, I strongly suggest your daughter makes use of a free budgeting service - hopefully with her husband.
For information see familybudgeting.org.nz or ring free phone 0508 283 438 for details of local services.
The budgeting service advisers can help her with getting out of debt and - if necessary - can discuss options such as KiwiSaver withdrawal, bankruptcy, or an alternative to bankruptcy called the No Asset Procedure, which applies to those with debts of less than $40,000 and no "realisable assets".
The sooner your daughter takes action, the sooner she can release herself - and you - from all this worry.
Q: What happens to a student loan if you die? Say you have the degree, the well-paid job, mortgage, wife and kids, and tragedy strikes. What happens to the loan, and who if anyone is liable?
Secondly, what happens if you have not paid off the loan by the time you retire?
My wife, who is 10 years younger than me, has a student loan and a job she loves, but was cut back to part time. Thus little is being paid off the loan as her income is not large.
As I intend to retire at 65 it is also likely she will give up work and we will go on a combined pension. I calculate that the loan will not be fully paid off by that time.
A: The question about death is straightforward. "When the borrower dies, their student loan is written off," says Inland Revenue.
But retiring doesn't let you off the hook. Before or after retirement, if you're in New Zealand and earn more than the threshold amount - $367 a week, $734 a fortnight or $19,084 a year before tax - you have to repay your student loan at the rate of 12 cents for every dollar over the threshold, says Inland Revenue. There are other rules for people with other income and people overseas.
Earnings include NZ Super. So even if your only income is NZ Super, in some cases student loan deductions will be taken from your Super. And if you're still earning a salary or wages after 65, you may have student loan deductions from both income sources.
For more info, see tinyurl.com/loansandsuper.
Q: The separated woman in last week's column has several similarities to my situation 14 years ago.
Although her main question was about a mortgage, there are other financial options for her in the meantime.
She may qualify through Winz for an accommodation allowance and/or jobseeker support.
If the young adults are dependent, is the father contributing financially for them? If they are independent, are they contributing towards household costs, as the home situation has changed? Something for her to consider is how long they will actually be residing with her.
Her last paragraph sounds as if the family home is her security blanket at the beginning of an unexpected separation.
Mortgage adviser Karen Tatterson's advice is extremely good - facts, figures, sound guidance in looking at all options to best make a decision for her future in terms of finances and living conditions.
A bit of counselling to settle the emotions is also helpful before making decisions. Good luck to her.
A: Thanks for some ideas our correspondent might not have thought about.
• 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 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.
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