Maryβs Q&A column appears in the Business section of the Weekend Herald. Mary was a finalist for the "Best Columnist β General" award for this column in the 2014 Canon Media Awards.
NZ Herald 7 April 2012
Q&As: Best ways to play the KiwiSaver game if you are an employee with a mortgage
- 2 readers argue - convincingly - with my comments last week on student loan repayment
- Why a reader changed her attitude to repaying her children's student loans
Question: My husband and I are both teachers. We joined KiwiSaver at the start, but our employer does not contribute to it as they pay into our teacher scheme. We contributed via our salary at the minimum, which was more than enough to cover the $1043, so we would get the maximum tax credit each year.
When the government matching $1043 was reduced to 50 per cent I opted us out, taking a contributions holiday. I have been saving money to contribute $1043 each by June 1st to get the tax credit. But as we are mortgage payers, is this the best thing to do?
Our joint income is $150,000, we are both in teacher schemes and have pensions transferred from the UK.
Answer: While your case is fairly unusual, there's a point here that applies to a much larger group - everyone in KiwiSaver who has a mortgage.
But we'll look first at your situation. As you note, your employer doesn't have to contribute to your KiwiSaver account because they contribute to another super scheme for you. That's to stop "double dipping" by employees.
It means you get the same deal from KiwiSaver as the self-employed and other non-employees. Your incentives are just the $1000 kick-start and the annual tax credits.
There are two good ways you can approach KiwiSaver:
Contribute 2, 4 or 8 per cent of your pay - as you did until recently.
Take a contributions holiday and put in just enough to get the maximum tax credit - as you do now. For most employees, this wouldn't be a clever choice, as they would miss out on employer contributions, but you don't get them anyway.
With the second option, everyone except those on low pay contributes less money to KiwiSaver. If you squander the difference on junk, clearly you won't come out ahead financially. But you have a really good use for the spare money: repaying your mortgage as quickly as you can.
Before KiwiSaver existed, reducing your mortgage fast was always a good idea. It might or might not make you wealthier than saving or investing, because future mortgage interest rates and investment returns are unknown. But it's low-risk and easy.
Then along came KiwiSaver with its incentives, which made it better for most people to contribute to the scheme than to make extra mortgage payments. But it's probably still best to contribute only to the point that you receive all the incentives you can get - in your case putting in $1043 a year - whilst transferring further savings into mortgage reduction.
How does this apply to employees who receive employer contributions? They should contribute the minimum needed to get the boss's contribution and the maximum tax credit. In most cases that means putting in 2 per cent of pay and - for those who earn less than $52,150 a year - topping up their contributions to total $1043 a year.
Any employee with a mortgage who is currently contributing more than that to KiwiSaver will probably end up better off if - like our correspondents - they put that extra money into faster mortgage repayment.
A few further points:
The halving of the tax credit shouldn't have had anything to do with your move to contributions holidays. You still have to contribute the same $1043 to get the maximum tax credit. But perhaps it just prompted you to take action, and that's fair enough.
The deadline for getting your $1043 into your account is June 30, not June 1 - although I suggest putting the money in a week or two earlier, just in case it takes a while to process.
It's probably better to drip feed the money in, at $20 a week or $87 a month, than to put it all in at once.
Why? For one thing, it's usually easier. You just set up an automatic transfer from your bank account. Also, spreading contributions over the year means you make some contributions when prices are low - which of course is good - and some when prices are high. It's less risky than putting all the money in at once, when markets might be up.
Having said that, though, we're not talking large amounts here. So if a lump sum is more convenient for you, go for it.
Question: The government's proposal to set the bailiffs on expat students - as discussed last week - is not the answer.
I agree 100 per cent that the loans should be repaid, as do 99 per cent of the overseas students, but it's the excessive compounding interest that is lumped onto the loans that stops repayment.
This year the interest is set at 6.6 per cent.
Countless young people were sucked into the easily obtained loans to study degrees which, when obtained, were of little use to the labour market.
To find work they have gone to Australia and beyond, but as we all remember in our 20s and 30s there is not a lot of cash left by the time all the outgoings are met, no matter where you live.
I have spoken to many young New Zealanders overseas about student loan repayment. Their reply is why bother paying 9 per cent of your salary per year when in most cases it won't touch the principal of the loan but gets sucked up on the excessive interest added to the loans each year.
Let's not make criminals out of our best and brightest. There are simple solutions. For any Kiwi overseas with a student loan who signs up to direct debit 9 per cent of their salary per year, the IRD would wipe all the interest that has been added since the 0 per cent interest came in for New Zealand resident students.
Let's stop trying to make money out of these loans and ensure our kids come back to New Zealand one day. Furthermore, lets not discourage young New Zealanders from tertiary education.
We shouldn't kid ourselves. We need these educated, overseas-experienced New Zealanders to come home one day with fresh ideas ready to work and pay taxes.
This is not a freebee; it's an investment in our country's future.
Answer: Well put. You and the correspondent below have persuaded me that I may have been too harsh on students last week.
And I like your idea of forgiving interest to those who sign up for direct debits - or perhaps we should say those who stay signed up. When they have repaid their principal via those direct debits, that would be a good time for forgiveness.
Question: A contrarian viewpoint on your recent student loan piece.
We, as a nation, often view and describe student loans as simple, literal debt owed to the national account by ex-students. This underpins most of the points made in your column, like "when they are overseas ... New Zealand is not benefiting from their education".
Really? Surely it's not such a black and white issue, especially with increased labour mobility these days? What if I'm living overseas for all but 32 days a year, choosing to remain a New Zealand tax resident but benefiting from interest-free eligibility rules? What if we were to view these loans as early-career seed investment in the brightest young talent New Zealand produces, with long-term benefits?
In addition, aren't the cross-country comparisons you used last week at least as complex as the cross-generation comparisons you discarded? The US has its longstanding, generous and extremely mobilised alumni associations; federal vs state structure, etc.
Not totally disagreeing with the point of your column, just a bit of Devil's Advocate from a loan-ower (or owee?), creating businesses which are based/incorporated in New Zealand while using my overseas base to more quickly build the viability of those businesses.
Answer: Fair points, especially about my comparing countries but not being willing to compare generations. That international data I used last week came from the OECD, which presumably does its best to make different countries' numbers comparable. But there are always difficulties.
Good luck with all your ventures. You sound like the sort of entrepreneur we need.
Oh, and it's loan ower, not owee - to the extent it's even a word. The rule is that if the word ends in "er" the person is the doer. If it ends in "ee" the person has something done to them. Think of employer and employee.
In recent years, this has got a bit messed up, with some people using "escapee" when it should be "escaper". As the daughter of a high school English teacher, I can't help getting crabby about such usage.
Question: I too was always critical of those reluctant to pay their student loan. However, after our experience last year we have encouraged our daughter who has recently completed studies not to pay a thing until it is absolutely necessary.
Our son completed study at the end of 2011. He received notification, early in 2012, that his loan was about to be transferred to the Inland Revenue Department. Shortly after, the Christchurch earthquake occurred.
We had the money for his loan saved in Bonus Bonds through the years. I had already investigated repayment information and knew we could get a discount for paying early. Within weeks of the earthquake, with constant media attention on the cost to the country, we withdrew our funds and sent a cheque (minus discount) to pay his loan in full.
Because we did not wait until the new financial year, which I had not understood was necessary, we were not entitled to the early repayment bonus. We paid too early!
The year progressed with my son then having the extra money now owed withdrawn from his wages. Because we assumed, like a mortgage, payments would no longer be deducted when repaid, it took us some time to realise deductions continue until you tell them your loan is paid off and request them to stop. The frequent phone calls needed to finally get extra payment refunded in February this year were annoying.
My daughter's full student loan is also sitting ready to pay in her Bonus Bonds account. There it will stay for the moment.
Why does red tape have to make everything so complicated? Our lesson cost us time, stress and approximately $600. We have learnt it well.
Answer: I can't say I blame you for changing your attitude. The reaction to your overly early repayment seems harsh. And I would also have assumed that pay deductions would stop when the loan was repaid. At least your letter has warned others about that.
More letters on student loans next week.
* Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. 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 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.