Mary's Money column appears in the
Business section in the Weekend Herald.
NZ Herald 2 June 2012
Q&As: Should charity begin at home?
- Advisers may not be the best source on comparing KiwiSaver providers - so how should you do it?
- Can a landlord get KiwiSaver first home help?....
.... And can a son who buys an expensive home with his Dad?
- An accountant questions Housing NZ policy
Question: I congratulate those willing to place their money and their time in building the homes for the underprivileged overseas - as mentioned in your last column. However, I feel that there are many families in Christchurch that are still living in caravans, in cold and wet conditions that would appreciate the effort as well.
How about we bring our attention to the unfortunate members of our own country? Spread the love a little closer and then let it ripple out to the rest of the world.
Answer: I don't fully buy the "Charity begins at home" argument. Why does somebody deserve more support just because they happen to live in this country? Many people elsewhere struggle more than any New Zealander. They need more than ripples.
Meantime, though, if a New Zealander who is not already busy supporting people overseas would set up a programme to help Christchurch families, I'd be all for it.
Question: I have a default provider for KiwiSaver, a low-risk option. How do I rate it to similar schemes offered by different providers?
I have been recommended by a financial adviser to move to another "preferred" provider who is achieving supposedly better financial outcomes for their clients. I would like more substantial information before making a decision.
Answer: And well you might. I've got two worries about the adviser's suggestion.
The first is that while the adviser might have your best interests at heart, she or he might "prefer" the provider at least partly because of incentives it gives to advisers. I suggest you email and specifically ask the adviser if they will receive any commission or other rewards if you switch to that provider. Then you will have the response in writing.
By the way, I recommend the same for anyone else using a financial adviser. Get a statement in writing on what the adviser will receive from all sources - money upfront or later, trips to conferences, any other incentives - when you make investments through them. And don't accept protestations that all advisers receive these things. See the Info on Advisers page on www.maryholm.com.
My second worry is that even if the adviser receives nothing if you make the switch, the recommendation might not be sound.
Just because a KiwiSaver provider's funds have performed well, that won't necessarily continue. It's not uncommon for top-performers to rank well down in the next period. This is probably because they hold riskier than usual investments, which tend to either soar or plunge.
Apart from that, different providers report their performance in different ways, so comparisons can be misleading.
So how should you weigh up KiwiSaver schemes? It's not easy. I recommend putting emphasis on fees, as these can make a big difference, especially over long periods.
Let's say, for example, that an 18-year-old, his employer and the government are together putting $250 a month into his KiwiSaver account, and returns average 4 per cent a year after tax. If total fees are 0.4 per cent, the fund will grow to almost $363,000 by the time the teen is 65. But if total fees are 1.2 per cent, the fund will grow to less than $290,000.
For information on fees, go to the KiwiSaver Fees Calculator on www.sorted.org.nz. Some people say its results aren't totally reliable, but it's the best anyone has come up with so far.
However, the future looks brighter for KiwiSaver comparisons. In the recent Budget, Bill English announced that new KiwiSaver disclosure rules will take effect from April 2013. "Fund managers will be required to report their performance and returns, fees and costs, assets and portfolio holdings, and liquidity and liabilities," said English.
The information will be in a standardised form on each provider's website. And I hope somebody - in or out of government - picks up on the suggestion in a recent paper published by the Retirement Policy and Research Centre at the University of Auckland. The paper recommends that KiwiSaver providers "should be required to give a central body all relevant data for the calculation and publication of comparative returns."
It would be great to have the information all in one place - and presented in a way that KiwiSavers could easily understand.
The paper, by Centre co-director Michael Littlewood and Michael Chamberlain of KiwiSaver provider SuperLilfe, also argues that KiwiSaver providers should not be allowed to publicise gross before-tax results, or at least should be made to give greater prominence to results presented after tax and fees - the returns that people actually receive.
"The complexities of income tax and the structures now used by providers make the unravelling of investment performance a confusing business," says the Centre. "Gross returns are almost meaningless and are certainly not comparable across providers."
It adds, "Regulators need to adopt a principled approach and require managers to disclose performance in a way that is not misleading and can be understood by the average, non-expert investor." Hear, hear!
Where does this leave our correspondent? I suggest you compare the fees of your current provider, the "preferred" provider and others on Sorted.
You might also look into another important factor - communications. Check out providers' websites to see if they communicate clearly, and perhaps ask a few "finalist" providers to email you a sample of their regular statements to members. It's really important that those are easy to understand.
Alternatively, you could wait until next April and see if the new and better information is helpful. Staying in a less-than-optimal fund for one more year in the meantime probably won't make a big difference to your final savings total.
Question: I have a 5 per cent deposit for a house in South Auckland around the $200,000 mark. I would like to buy, renovate and then rent it out in 3-6 months. I've only been in KiwiSaver two years and don't want to wait another year to get my money out.
If I buy a house this year and turn it into a rental and transfer it to a company or trust, can I then use my KiwiSaver money when ready to buy a house closer to the area I work in central Auckland?
Answer: There are two aspects to KiwiSaver help for first home buyers. The withdrawal of your and your employer's contributions is administered by your provider, while the first home subsidies are administered by Housing NZ.
If all you want to do is withdraw money, you should ask your provider how they would react to your plan.
But if you want the subsidy, tread carefully. "If someone applied for the deposit subsidy and the title of (a rental) property was in the individual's name, then they would be classed as having an interest in estate and not eligible, regardless if they were living in it or not," says Housing NZ.
What if the rental property is in a company or trust? "Owning a property in the name of a company or trust does not make you ineligible to qualify for the deposit subsidy. However, an application would need to be made fully disclosing the situation, and an assessment would be made on eligibility."
Something tells me that someone who owns a rental property - in or out of a company or trust - wasn't quite what the politicians had in mind when they set up the subsidy. But you never know your luck.
Question: My 22-year-old son is looking to buy his first home soon. He has enough deposit to buy a modest home in Auckland, but would like to buy in a more expensive area that is more convenient for transport.
He has asked me whether I can help - going in as either 30 per cent or 50 per cent partner. Can he buy using KiwiSaver if the second person going in with him already owns property?
If so, does KiwiSaver let him have the subsidy if his share of the house purchased is under $400,000 even though the actual price of the house is greater than $400,000?
Can this be set up in a family trust? Does the income threshold allow losses brought forward or rental losses to be included in the total income?
Answer: We start out with some good news, but then I'm afraid it's all downhill.
"Yes, a property can be bought with a second person, even if the second person already owns a property," says a Housing NZ spokesperson.
But to qualify for the deposit subsidy - which has more rules than the withdrawal - the total income of the two purchasers would have to be $100,000 or less in the previous 12 months.
On the house price, the spokesperson says, "It is based on the house purchase price, not on individual shares of the purchase. Any property purchased for over $400,000 in Auckland, Wellington or Queenstown will not qualify for the subsidy. Similarly, the same in the $300,000 regions."
And on the family trust idea, "No. To qualify for the subsidy, the purchase of the property must be made in the name of a natural person and not a trust. The individual KiwiSaver member must be clearly stated as a purchaser in the agreement for sale and purchase."
The final answer, to your question about losses being included in income, is short and sharp: "No."
Maybe your son should settle for something modest to start with, and move up later on - the way most of us did in the bad old days.
Question: From your article last week about KiwiSaver first home subsidies: "Says a Housing NZ spokesperson, 'As far as income is concerned, all we would want to see is evidence from IRD of what your income was for the last 12 months. Clearly, if someone was working overseas for the bulk of that period then the IRD statement would only show New Zealand earnings and that would potentially be considerably less than $100,000.'"
I now write: Unfortunately the Housing NZ person does not understand NZ tax law. The people in your article will be considered NZ tax residents as they plan on returning, thus all their income (whether earned in New Zealand or elsewhere) should be included.
Signed, an accountant.
Answer: Perhaps all their income should be included. But apparently it isn't.
Inland Revenue confirms that, "A NZ tax resident is required to file a return on their worldwide income, and all income would be included."
However, Housing NZ doesn't look at tax returns. "We have been asking for personal tax summaries - this itemises all income and PAYE paid by employers in NZ," says a spokesperson.
While you might disagree with it - and I might, too - that's the way it's done.
* 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.