Mary's Money column appears in the
Business section in the Weekend Herald.
NZ Herald May 9 2009
Q&As: Should fun be the deciding factor for 20-year-old's savings?
2 Q&As about topping up KiwiSaver accounts to get the maximum tax credit
Plus: Survey finds top KiwiSaver gripe is lack of information
Question: I am a 20-year-old apprentice mechanic, a member of KiwiSaver and have a term investment of $10,000 coming due next month.
I do not need access to the cash in the short to mid term, but with term investment interest so low I am unsure whether to leave it in the bank for a bonded period, put the money into the share market, or invest in assets that I would pick to appreciate (eg a classic vehicle). I would be grateful for any advice you can give me.
Answer: It probably doesn't matter much which investment you choose. Assuming you saved the $10,000 from your pay, you've already done really well financially on an apprentice's income. Keep up those habits, and you'll be a wealthy man anyway.
Still, let's do the best we can for you. You've got time on your side, so you're in a position to invest in something volatile in the anticipation that over the long run it will probably perform well.
I don't know anything about the classic car market, and I suggest you stay out of it unless you do - or you can get advice from somebody you trust who is not a salesperson. Investing successfully in art, collectibles or anything like that takes knowledge. Those who know often make money from the dabblers who don't.
Shares are different. Because of the way the share market works, an amateur can often do as well as the experts by investing in a well diversified share fund.
If you're not in the know about cars, then, the sensible answer may be shares. Nobody knows if this is a good time to buy shares, but if you put, say, a third of your money in a share fund now, a third in a year, and a third in two years - leaving the rest in the bank in the meantime - you should end up buying at least some at good prices.
Then again, you would probably get more fun from a car. And given your good savings habit, I don't see why fun shouldn't win the day.
Question: This is confusing. I get paid $630 per week in the hand. I put in $15 a week into KiwiSaver. Will I get the full amount after a year with the government tax credit? Can you tell me if I get the $1064 or whatever it is? I'm lost!
My work pays too, so my employer and I pay around $30 a week. Do I get the whole government dollar? Please help.
Answer: Settle down. It's not all that tricky. We'll assume you've been in KiwiSaver for the whole July-June year, which means you are eligible for a maximum tax credit of $1043 - strictly speaking $1042.86, but I round it up because it's an awkward amount.
The tax credit matches just the money you put in. It has nothing to do with your employer's contribution. To get your contribution total, multiply your $15 a week by 52 weeks to get $780 a year. If you don't do anything else, the government will match your contributions, dollar for dollar, by putting in $780.
However, you can put in an extra $263 before June 30 to get you up to the $1043 maximum. The government will also match that $263, so it's a good deal. Deposit the extra with your provider or with Inland Revenue.
If you haven't been in KiwiSaver the whole July-June year, your maximum tax credit is proportionate to how much of the year you have been a member. For more on this, see "Tax credit timing" on the KiwiSaver Basics page of www.maryholm.com.
Question: Thanks for publishing my question last week about topping up my KiwiSaver account to get the maximum tax credit.
Unfortunately I worded it badly and didn't really get across what I was meaning to, but I emailed IRD at the same time I emailed you and, with a better worded question, got the answer I was after. I've published the bulk of their response below, just in case you thought it might be of use to your column.
My question was: how do I know how much I've already contributed for the "KiwiSaver year", i.e. when do my PAYE deducted contributions count as a contribution?
Inland Revenue said: "Your contribution is counted as received on the 15th of the month that it was deducted. For instance: you have KiwiSaver deductions in March, these are not sent to Inland Revenue until April. Once we process these deductions into your account, they will have an effective date of the 15th March.
"If you make a voluntary payment directly to Inland Revenue it will be counted as received on the day you made the payment. Eg if you make the payment on the 1st May, it may not show up in your account for 15 working days as it may need to be processed further. However, this will have an effective date of 1 May when it is applied to your account.
"Your scheme provider may have different policies / rules around processing. If you make a voluntary payment directly to your scheme provider you may want to contact them to find out when they will 'apply' it to your account."
Answer: I'm sure others will find this helpful, so thanks for sending it. The main point is that any contributions taken out of your pay right through to the end of June will count towards the tax credit.
A lack of information about what's happening in their KiwiSaver accounts was one of the most common complaints among KiwiSaver members in a recent survey. This was somewhat offset by a smaller number who noted that they were happy with their providers' regular statements.
There were two other equally common gripes from the 165 KiwiSaver column readers who responded to the survey - which put respondents into a draw to win a copy of my new book, "The Complete KiwiSaver". One gripe was that employer contributions will no longer rise from 2 per cent to 4 per cent of pay in the next two years. The other was that KiwiSaver has been changed too often - with some adding that they worry about possible future changes.
Said one respondent, "Darn, can't a government leave well alone in relation to retirement funding. They all want to have a go, and I never quite know what will happen next." Added another, "Once you're in the scheme you're along for the ride, without much say in what happens."
That aspect isn't as bad as it seems though. If you dislike any changes to KiwiSaver, you can simply stop contributing - as long as you have been in the scheme for a year if you are an employee. You will still benefit from the incentives you received when actively involved.
Speaking of which, the vast majority of respondents who were in KiwiSaver said those incentives were the main thing they like about KiwiSaver. "I believe it is an excellent investment because of the financial assistance from the government," said one person. "There is no other way to get a return like this."
Forty per cent also said they liked the "forced savings" or the fact that they didn't see the money because it automatically came out of their pay. One commented, "I spend every penny I earn. KiwiSaver is enforced saving (I put in 8 per cent). Even if I earn very little in the way of interest, it is still money that I would never have saved on my own." Another said, "I don't miss the money from my pay, and I have already $3,600 in my investment account in just 18 months. So little effort for such a fabulous result, and I know it can only get better."
Other popular pluses for the scheme were that it promoted a "savings culture" in New Zealand, and that it is easy to understand. However, comments such as "difficult to understand" were common too.
Frequent complaints also included:
• Not wanting the money tied up until NZ Super age - or for some people until they bought their first home.
• The National government's removal of the $40 a year fee subsidy. Said one reader, "To me, this is nothing short of defaulting on what I considered to be a binding contract." That's a good point - although losing $40 a year when you can still get up to $1043, plus any employer contributions, is not all that big a deal.
• There are too many providers, making it "hard to know if you have the right one," as one reader said.
• Wanting more incentives - which I must say seems greedy, in light of how much taxpayer money already goes to KiwiSavers.
• The long delay between money leaving employees' pay and landing up in their KiwiSaver accounts - a gripe that seems legitimate.
• The lack of compulsion for either all employees or all New Zealanders - a sentiment I don't agree with. People should be free to make their own savings choices.
• The lack of a government guarantee - which again I don't agree with. If there were such a guarantee, clever people would invest in the riskiest KiwiSaver funds because they are likely to give the highest returns. Taxpayers would end up bailing out many people.
• Worries about recent poor returns on KiwiSaver funds. "I'm in a moderate fund but it has fallen," said a self-employed reader. "I don't know if I will get any return on my investment. I may be in negative territory in retirement. I can't wait for years and years for the negatives to turn around, as you and the investment advisers keep promising."
That's too pessimistic. Nobody can get money out of KiwiSaver for retirement spending until at least mid-2012 - except in cases of financial hardship, serious illness and so on. It would be surprising if a moderate fund hasn't turned around by then.
Even if it hasn't, the reader will still have a huge buffer. How come?
Presumably, as a self-employed person, he has been contributing only up to $1043 a year, because there's nothing to be gained by tying up more than that in KiwiSaver. That means the government will have matched his contributions and also added the $1000 kick-start. So less than half the money in his account came from him.
I would be astounded if his account balance in a moderate fund in 2012 is less than what he himself put in.
By the way, for employees the buffer is even larger, with employer contributions as well.
* 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.