Mary's Money column appears in the
Business section in the Weekend Herald.
NZ Herald March 21 2009
Q&As: Tips for retired couple whose interest income has halved.
Savings accounts may pay more interest than term deposits - but take care.
Tax on foreign shares seems tough in current environment
Question: Please, please, please - is there another topic other than KiwiSaver we can have your advice and opinion on? Much as I appreciate a majority of people may have a vested interest in the subject, there are also a host of others who, like my wife and I, have seen their income halved during the last few months.
With interest rates dropping rapidly and petrol prices etc. going the other way, is anyone concerned about the retired population with a few dollars in investments? Tax cuts will not help, roading contracts will not contribute to our income, so where do we go for the best deal?
We have a small term deposit maturing very shortly. Can you suggest a suitable scheme where it might be safe and earn a reasonable rate? We have been advised that a biscuit tin under the bed is a good possie, but of course there is always the risk of theft or fire! Please, please, please can you help.
Answer: How could I turn down six "pleases"? And I do feel for people in your situation. There's no magic solution, but here are a few suggestions that might help:
• Shop around - checking out other banks but also other products at your own bank. The next Q&A makes a good point about this.
• You could try a finance company deposit that pays higher interest. But I suggest you do that only if it's covered by the government's deposit guarantee scheme and it matures by October 2010, when the scheme expires.
Go to www.interest.co.nz for bank and finance company interest rates. The first column, called "DGS status", tells you what's covered by the deposit guarantee.
• If you have more than a few thousand dollars, look into high-quality bonds, which generally pay higher interest. A stockbroker can tell you what's available.
• If you have lots more than a few thousand dollars, separate out the money you don't expect to spend for at least ten years and invest in a share fund or property fund. The returns will fluctuate, but will probably be higher on average than bank returns.
• Eat into your capital. Many retired New Zealanders are reluctant to do that. They struggle through retirement and then leave heaps to their children, who may not even need it.
One reason for this is fear of outliving your savings. But if you set up a careful plan, you should be fine. If you end up living to a really old age, you will probably be happy on NZ Super at that stage.
To work out how much to spend each month, go to the "Managing your nest egg" calculator in the "60plus" section of www.sorted.org.nz.
Alternatively, do a simple calculation. Say you have $50,000 in savings and you expect to live another 15 years - at least on a good day! Divide 15 into $50,000, which comes to $3,333, and withdraw that much each year - around $278 a month.
As long as your after-tax interest rate is higher than inflation, your remaining savings will grow more than inflation. That means you can increase your withdrawal each year by inflation.
This is conservative. Your money will probably actually last longer than 15 years. Note too that most retired people say their spending decreases as they get older.
On your comments about KiwiSaver, I try to have at least one non-KiwiSaver Q&A in each column - even though the clear majority of the letters I receive are about KiwiSaver.
Last week was an exception, because I wanted to look into various aspects of an important new change to KiwiSaver. But so far this year I have written 15 Q&As about KiwiSaver and 19 about other topics, plus two that are hard to categorise - one in which the reader mistook the NZ Super Fund for KiwiSaver and one complaining, like you, that I wrote too much about KiwiSaver.
Given that nearly a million New Zealanders are now in the scheme, and there are probably another two million who would benefit from joining, I should probably cover it more. Some over 65s, too, want to learn about KiwiSaver so they can help family members take part.
Having said all that, this week's column is a KiwiSaver-free zone. Hope you're happy.
Question: An observation that may help those who like myself have term investments with various banks. And a question.
As investments mature and lower interest rates start kicking in, a savings account may prove a good interim option.
I have just discovered, for instance, that BNZ Rapid Save (which I used to operate merely as a transit account) now offers an interest rate that is at least equal to some of their (and other banks') term investment offers.
The banks seem to encourage this kind of saving which, for us, has the obvious advantage of immediate accessibility. If and when a better alternative becomes available, the money is not locked in and can be withdrawn at the drop of a hat.
My question is: I presume that savings accounts of this kind are covered by the Government guarantee for term investments?
Answer: They are indeed. As I said above, www.interest.co.nz shows what's covered. But if you want to get it from the horse's mouth, go to www.treasury.govt.nz.
That website has a list of approved institutions. And in its Q&As about the scheme, it says that "deposits, term deposits, current accounts, bonds, bank bills and debentures" in the approved institutions are all covered.
A word of warning, though: While a savings account might pay higher interest, you could be sorry later that you didn't tie up your money in a term deposit if interest rates fall further.
In iffy situations, it's often good to put a buck each way - holding some of your money in a savings account and some in a term deposit. You might even split the second lot into a shorter-term deposit and a longer-term one. That way, at least you don't get it all wrong.
Question: The new rules of taxation of Foreign Investment Funds (for individuals holding more than $50,000 in FIF) broadly tax 5 per cent of the opening value of the total investment, unless it can be shown that the total gain over the year has been less than 5 per cent - in which case the lesser gain is taxed. If there is a loss incurred during the year (closing value plus dividends being less than opening value) then there is no tax levied.
With the downturn in the world markets, most FIFs have dropped in value dramatically, often reflecting in a net overall loss for investors.
What happens when the market picks up and the investment starts gaining value and comes back to what it was some years ago? How is tax levied when the investor has seen no actual gain in the investment?
For example: John had $100,000 worth of FIF investments on 1 April 2008. He received no dividends during the year, and the total value of the investments dropped to $90,000 as of 31 March 2009. No FIF tax is payable for 2008-2009.
In 2009-2010, John's FIF investments yield no dividends, however their value rises to $95,000. John has to pay tax on 5 per cent of the opening value, which is $4,500.
In 2010-2011, John's FIF investments yield no dividends, however their value rises to $100,000. John again pays tax on 5 per cent of the opening value, which is $4,750.
Over three years, the value of John's FIF remains constant at $100,000. However, John has paid tax on gains of $9,250.
Would appreciate your advice on whether the above computation is correct, or whether the IRD makes some allowance for such matters.
Answer: Your calculations are right, and I'm afraid Inland Revenue doesn't make any allowance for the outcome.
Says the department's David Carrigan: "The reader is correct that a person does not pay tax under FDR (fair dividend rate) in a year where the New Zealand dollar value of their offshore share portfolio - including dividends - has dropped. They also do not pay tax on any dividends received from their offshore share portfolio.
"This is better than the old rules, which taxed a person on dividends from offshore shares even in years where the New Zealand dollar value of their shares had dropped.
He adds, "The person will pay tax under FDR in the following year if their offshore portfolio recovers (i.e. increases in value in New Zealand dollar terms). The reader is correct that the tax under FDR will apply even though the person may not have fully recouped their losses from the previous year.
"While this may seem inequitable, the old rules produced a similar result as the person would be taxed on the dividends they received from a foreign company whether or not the person had made an overall loss from the company."
That may not cheer you. You have to confess, though, that your scenario is a bit extreme for two reasons:
• John receives no dividends in any of the three years.
While overseas companies tend to pay lower dividends than New Zealand companies, most of them pay at least something most years.
And, as Carrigan points out, under the old rules you would have paid tax on dividends even in years in which the value of your offshore shares fell. Under FDR, you don't.
• You have share values rising by 5.56 per cent in 2009-2010 and by 5.26 per cent in 2010-2011. Rises of around 5 per cent get the worst deal from FDR.
If the shares - plus dividends - grew less than 5 per cent, you would pay tax on the actual growth. If they grew more, you would pay tax on 5 per cent. In years when growth is, say, 20 per cent, the 5 per cent maximum will be attractive.
I'm not trying to defend FDR. It's far from perfect. But you have painted a particularly bleak picture.
Over time, there will be some years when FDR looks good and some when it surely doesn't. At least it gives you a break in horrid years and taxes you only in happier times.
* Mary Holm is a seminar presenter, part-time university lecturer and bestselling author on personal finance. 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 firstname.lastname@example.org 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.