Mary's Money column appears in the
Business section in the Weekend Herald.
NZ Herald 17 July 2010
Q&A: KiwiSaver works well for beneficiaries - and there may be a bonus for those who are unwell
Am I a financial adviser? And why it matters to you
Question: I read your column regularly and am aware you have dealt with KiwiSaver questions many times. My question is a bit different.
My 45-year-old son has a brain injury. I am 70-plus and hold power of attorney over his affairs. He is on a disability benefit, and probably will be for the remainder of his life.
He is in a brain injury unit and needs constant supervision as he has no current memory - he cannot remember things from moment to moment. He does have some "old" memory, however. He is divorced with two teenage children still attending school for whom he pays minimum support. My husband and I would like to do the best we can for him for his future.
My queries are:
• Can a beneficiary join KiwiSaver?
• Would it be advisable for me to join him up to KiwiSaver?
• How would I go about it?
• Where would I get a list of providers?
• Have you any further advice or recommendations that would help me?
Answer: Beneficiaries certainly can join KiwiSaver, and it can work well for them.
Like any other non-employee, they sign up with a provider and receive the $1000 kick-start about three months after joining. If they can't afford to make any contributions, they can just leave it at that.
It's better, though, if the beneficiary - or a friend or relative - can contribute up to $20 a week or $87 a month or $1043 a year. The government will match that contribution, dollar for dollar. And doubling the money going in means they get double the amount coming out again later.
In your family's situation, I assume when you say you hold power of attorney over your son's affairs that you mean an enduring power of attorney in relation to his property, which takes effect if he becomes mentally incapable.
That means that, in signing up your son to KiwiSaver you will be - legally speaking - acting as your son. So there is no issue about your age or your son's mental capability, says Chapman Tripp partner Mike Woodbury.
One complication for a beneficiary with a disability or illness is that they might have a shorter than usual life expectancy, so they may want to withdraw their KiwiSaver money before NZ Super age.
There are two ways this might be possible under the KiwiSaver Act:
• The person suffers significant financial hardship, in which case they can withdraw their own contributions, any employer contributions, and all the returns - interest, dividends and so on - earned on the account. The government's kick-start and tax credits have to stay in the account.
However, in your son's case, as a beneficiary he probably wouldn't qualify as suffering such hardship.
• The person is suffering from a serious illness, in which case they can withdraw all the money in their account. Serious illness is defined as "an injury, illness or disability (a) that results in the member being unable to engage in work for which he or she is suited......or (b) that poses a serious and imminent risk of death."
Assuming that (b) doesn't apply, the question here is whether someone who is already unable to work when they join KiwiSaver - because of injury, illness or disability - can withdraw their money on the grounds of serious illness.
The people who make such decisions are the trustees of the KiwiSaver fund. How are they likely to decide?
"One view," says Woodbury, "is that if someone is unable to do any work when they join KiwiSaver, it follows that they cannot invoke the serious illness withdrawal facility (unless they later worsen such that 'a serious and imminent risk of death' arises), because when they joined they were already unable to engage in any work for which they were suited.
"On this analysis, which is based on a technical reading but reflects what I think was the likely policy intent, the relevant injury, illness or disability must:
• first be suffered (or first worsen sufficiently) after the person joins KiwiSaver; and
• prevent the person from engaging in work for which they were still suited when joining.
"The alternative view is that the KiwiSaver rules do not require a serious illness to have first arisen after the member joined KiwiSaver. Any New Zealand resident aged below 65 can join KiwiSaver irrespective of their health status, and there is no power (expressed or implied) anywhere in the KiwiSaver Act limiting their entitlements if, when joining, they are already seriously ill.
"The more permissive view effectively gives an already seriously ill person a right to draw down his or her money (including Crown contributions) from the get-go after joining," says Woodbury. This means the KiwiSaver member could take out government contributions as soon as they are deposited, "making the KiwiSaver account effectively a Government-sponsored call account."
Sounds too good to be true. And a somewhat mischievous KiwiSaver provider takes the idea even further.
"If you really wanted to rip off the system you would put $1043 in and a year later take out $3086 (the kick-start, your contribution and the tax credit). You then take a third of the money and put it back in the scheme and collect another $1,043 tax credit in the next year. You put the rest in the kids' KiwiSaver accounts - assuming that they are over 18 - and so they also get a tax credit. And then keep repeating this."
But such thinking hasn't gone unnoticed. Says Woodbury, "ASB raised precisely this issue in a submission on the November 2009 Tax Bill proposing a range of KiwiSaver-related remedial amendments." The issue "is on the policy people's radar and is being looked at from a policy perspective.
"In the meantime scheme providers must arrive at their own interpretations and will incline, I expect, to being carefully conservative given the doubt and the moral overlay."
Not necessarily, says our provider. In his view "the legislation doesn't require the illness, injury etc to occur after they join KiwiSaver. It is clear that a person need only be suffering an illness, injury or disability and not be able to undertake suitable work".
"If they were trained in IT and had a successful job and then suffered a brain injury, they could not do the job indicated by their experience, and so they would qualify. If they suffered an injury at school then they have no experience, and so they could not do any job and may not qualify."
He adds, "My guess is that most providers would look at this and say, 'If I get audited by the Government Actuary or the IRD, would I be able to defend it?' As the person in your example has two kids my guess is that he had a job and a life and then suffered an accident, and so allowing a withdrawal would be defensible," he says.
Still, if I were you I wouldn't count on being able to take the government's contributions straight out again. The more conservative alternative - to contribute $1043 each year and let your son's KiwiSaver account grow - would probably suit you better.
KiwiSaver could still considerably benefit your son if the money is used:
• if he falls into significant financial hardship;
• if he is close to death before NZ Super age;
• to make his life more comfortable after NZ Super age;
• as a legacy for his children. Any money he doesn't use could be left to them. It will be considerably more than if he or you saved for the children outside KiwiSaver.
On your question about providers, go to www.kiwisaver.govt.nz and type "locate" in the search box. That leads you to a list of providers that includes websites and phone numbers. Choose a company you know and trust, and ring them and ask how to sign up your son.
It sounds to me that your son is lucky to have you as parents. All the best to all of you.
AN ADVISER OR NOT?
I was startled to read Brian Gaynor's column last Saturday, which started like this:
"Financial advisers are heading back to school, regardless of their experience. Under the Code of Professional Conduct for Authorised Financial Advisers, Carmel Fisher, Mary Holm, Gareth Morgan, I and everyone else who offers full financial advice will have to pass a number of exams or assessments before the code comes into force on July 1 next year."
As regular readers will know, I have often said I'm not a financial adviser. And under current law, that's been fine. Anyone can call themselves an adviser - or "not an adviser".
However, the new law includes a new definition of a financial adviser. And Gaynor clearly thinks I'm caught by the definition.
Why does all this matter to you, as readers? It could affect what I can tell you.
If I were an authorised financial adviser, I would have to comply with the Financial Advisers Code of Conduct - including not saying things that might bring advisers into disrepute. I prefer to be an independent journalist, free to criticise - within journalistic ethics. Someone's got to stay outside the tent to report on what's going on inside.
What Gaynor perhaps doesn't realise is that journalists and lecturers are exempt for what they do "in the course of their occupations", and journalism and lecturing are my two main jobs. What about presenting seminars? Following a chat with a government expert, I asked Kensington Swan partner David Ireland, a member of the Financial Advisers Code Committee, for advice.
He reckons I'll be okay, as long as I limit any recommendations or opinions in my seminars to "classes of financial products", such as shares in general or conservative KiwiSaver funds. "You would only be caught if you made recommendations or expressed opinions about acquiring or disposing of particular financial products. General comments are outside the regime," he says.
Sounds manageable. Oh, and Ireland suggests I clarify that I am a freelance journalist in the list of my various roles at the bottom of this column. I always thought that was obvious. But, says Ireland, such things shouldn't be taken for granted under the new regime, "especially if you are relying on that occupational exemption." So thanks for prompting me to look into this, Brian.
* Mary Holm is a freelance journalist, part-time university lecturer, consumer representative on the board of the Banking Ombudsman Scheme, seminar presenter 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 email@example.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.