KEY POINTS:
Q. I have been reading everything I can about the KiwiSaver scheme and seeing how it can apply to my children. I have not yet seen any discussion of the problem that they have with joining KiwiSaver so I wonder if you could comment on it.
I
have two children who are over 18 years old and both are employed. Neither can afford to enter KiwiSaver because of student debts and the awful cost of living in Auckland.
They cannot join KiwiSaver other than as employees and they cannot afford the loss of the 4 per cent or 8 per cent of their gross income.
I am prepared to fund their KiwiSaver accounts up to the maximum tax credit level of $20 per week, but no further.
Now I can enrol my 11-year-old daughter in KiwiSaver by approaching a provider directly. But I cannot do the same for my children over the age of 18.
I am told by one scheme provider that if they did enrol as non-employees that IRD would detect them as employees by seeing their PAYE taxes, and presumably IRD would then dispute their membership of KiwiSaver.
So how do I get my children over 18 in employment into KiwiSaver when they can't afford it?
I see this as somewhat unfair compared with how my 11-year-old is treated.
A. The official view is that you're right - employees have to join KiwiSaver as employees. If they tried to join as non-employees, Inland Revenue would work out what was happening, as they have to supply their IRD number when they join.
I've heard of some employees challenging this by joining directly through providers and planning to contribute less than 4 per cent. They claim they can do this under one provision of the KiwiSaver Act, which conflicts with another provision. The issue may well end up in court, and who knows what way it will be decided.
Most people, though, won't want to introduce such hassle into their lives and will go along with Inland Revenue's version.
There are, after all, a couple of ways to reduce the impact of the rules. Here's how they might apply to you:
* Suggest the two older children take on small part-time jobs. They could then join KiwiSaver through those jobs only, and their contributions would probably be less than $20 a week.
If they wished, they could make extra voluntary contributions, directly to the provider, to bring their weekly totals to $20.
After April 2008, they would miss out on employer contributions on that extra money - assuming employer contributions become law as currently proposed - but they would get the Government's tax credits.
* If that isn't feasible, how about giving them the money to contribute 4 per cent of their incomes for just one year? Unless they are on really high incomes - and if they are, they should be able to afford KiwiSaver - that wouldn't amount to a huge total.
After a year, they could go on contributions holidays, putting in nothing for several years, to make up for your contributing more than $20 a week for the first year.
Note, though, that while on a contributions holiday, a KiwiSaver member can continue regular or lump sum contributions at any pace their provider will accept - although they get no employer contributions on that money. So you could be kind and keep giving them the weekly $20, allowing them to make full use of the tax credits.
It seems to me that one year of extra generosity towards the older two is probably fair. If all three children take over their own KiwiSaver contributions at about the same age, you'll probably end up putting more into your 11-year-old's account over the years.
By the way, in considering what you do for the 11-year-old, did you realise that the Government doesn't pay tax credits to those under 18? Also, it's proposed that employers won't be obliged to contribute to people under 18.
You might, therefore, just put a token initial amount into her KiwiSaver account, to secure the $1000 kick-start, and then stop contributions until she turns 18.
If your daughter takes a job in the meantime, she will have to put 4 per cent of her income into KiwiSaver. But as long as she has been a member for more than a year, she could take a contributions holiday to get around that if she wishes.
If you still want to save for her, of course, there's nothing to stop you putting more into her KiwiSaver account. But you might prefer to do it in another savings vehicle in which the money is not tied up.
One other thought: To get the children into the savings habit, you could ask the older ones to contribute $5 a week of their own money to start with, and the younger one $1 or $2 a week, and gradually raise the amounts. Even Aucklanders burdened with student loans can manage five bucks.
Q. I was wondering if I sign up the kids 7 and 9 for KiwiSaver and they go on to get decent jobs like their Dad, is KiwiSaver a good thing to be signed up to?
Four per cent of their future income at, say, $500,000 salary would be $20,000 locked away each year until age 65.
We are quite actively investing in both property and shares and hope to teach them how to be self sufficient financially. I feel that that amount locked away till age 65 is too inflexible in a financial planning sense.
I keep reading about how good it is to sign children up to KiwiSaver to get the Government and employer contributions. Would it be a good thing for future high earning professionals?
If so, how much should we be contributing for them? I wonder if their future employers would penalise them for joining KiwiSaver in pay negotiations because of the equivalent contribution they are having to make of $20,000.
A. It sounds as if we have a dynasty in the making. What if they decide they would rather be beachcombers?
Either way, actually, it won't matter that they have joined KiwiSaver.
As I said above, they won't get any Government tax credits or employer contributions until they are 18.
Still, I suggest you sign them up now, while the $1000 kick-start is there. Who knows whether it will survive Government changes?
Once they are in, they will have to contribute 4 per cent of any income they earn or - after a year's membership - take a contributions holiday. They can then renew those holidays, every five years if they wish, right through until they can get their money out.
Even on a contributions holiday, though, once they are over 18 they would be well advised to keep putting in at least $20 a week each, to get the tax credit. That's not locking away much money!
For advice on how much you should contribute in the meantime, see the above Q&A.
I wouldn't worry about future employment negotiations. Making our usual assumption - that employer contributions are passed into law later this year - I expect that employers will increasingly use total remuneration packages.
That means they will offer an employee, say, $50,000 a year, and the employee can take it all as cash - after tax of course - or take part of it as employer contributions to KiwiSaver, which are not taxed.
Employers will be partly reimbursed by the Government for their KiwiSaver contributions - up to $20 a week per employee. To the extent they keep that money rather than passing it on to their workers, employers are likely to encourage membership of KiwiSaver rather than the reverse.
Quick KiwiSaver info
The huge number of questions coming in about KiwiSaver show many people don't yet understand the basics of the scheme. But I don't want to keep repeating the basics because that will bore other readers.
To solve this, I've listed the rules and incentives, taken from my new book, KiwiSaver: How to make it work for you, on www.maryholm.com. Click on the KiwiSaver book page and scroll to the bottom. You might well find the answer to your question there.
* Mary Holm is a seminar presenter, author and publisher. Her website is www.maryholm.com. Her 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 (pref daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.
