Mary’s Q&A column appears in the Business section of the Weekend Herald. Mary was a finalist for the "Best Columnist – General" award for this column in the 2014 Canon Media Awards.
NZ Herald 28 March 2015
Q&As: 'No' on deductions but 'yes' on student loan for teen entrepreneur
- Clarification on KiwiSaver fees for children
- Doesn't performance matter more than fees?
- Give or lend to adult children when they need it, not when you die
Question: My son has an internet business which he has been running as a sole trader from the age of 15 whilst still at school, which has been returning around $40,000 a year.
He is now attending university and was wondering whether his university fees and expenses are tax deductible, and if they are does this preclude him from using a student loan?
Answer: Why am I not surprised that someone who did that well with a business in high school is now checking out all the tax and loan possibilities?
But I'm afraid the word from Inland Revenue isn't favourable. "You can't deduct expenses which are of a private nature, and this includes tertiary study fees and expenses, regardless of whether you're in a business or not," says a spokesman.
However, "A borrower who is running a business is not precluded from obtaining a student loan," he says.
There is, of course, the question of whether someone as well off as your son should be getting an interest-free student loan, at taxpayer expense. But I suppose it's not too different from rich people receiving NZ Super. If the government offers it, and you're eligible, why not?
Question: I have a young child and was interested in the "no fixed fee" KiwiSaver options in your column last week.
I have checked both Kiwi Wealth and Smartshares. Whilst they both say they don't charge fixed fees, they both have minimum charges (sounds like a fixed fee in disguise to me!) of $40 or $50 depending upon the fund chosen.
Having researched it further, I'll most likely be going with SuperLife. They have a low fixed fee (lower than the other minimums) and they offer something called myFutureFund. This allows you to save for your child in an accessible format. And if you sign up for both KiwiSaver and myFutureFund, there's no fixed charge on the future fund account (just the KiwiSaver account).
Answer: Sigh. If we were to start all over again with KiwiSaver, one of the first things I would push for is the same simple fee structure for every provider. They could vary their fee levels, but not the way they calculate their fees.
The current set-up makes fee comparisons tricky. Your research is a case in point.
Let's start with what I said last week. I referred to Canstar's KiwiSaver comparison, at www.tinyurl.com/canstarkiwisaver. It lists annual member fees, which are a fixed amount, and total published fees, which are a percentage of your account balance.
I said that for children with low account balances, total fees are likely to be lower if you go with one of the few providers that don't charge a fixed member fee. They include Kiwi Wealth and Smartshares.
However, a footnote on Canstar's website says, "Total published fees displayed includes the management fee, admin fee and trustee fee as a % of $7,500 balance as of 24 July 2014. Additional fees/tiers may apply."
And it turns out that both Kiwi Wealth and Smartshares charge differently for accounts with balances different from $7,500. I should have checked that last week. Apologies. I've now done so.
Says a spokesperson for Kiwi Wealth, "Our minimum fee is not a fixed fee in disguise. It is an either/or scenario. The minimum fee only applies when a member balance is below a certain threshold.
"For example, a member balance of $2000 would be subject to a $50 fee per year only ($40 if they are in the Default investment portfolio). A member balance of $5200 would be charged a percentage fee instead, as they have reached the balance threshold for the percentage fee to kick in (approximately 1 per cent of their balance equals $52 per year).
"It's important to note that this fee is an all-inclusive fee - there are no other fees charged for performance or administration as is common with other providers. With other schemes, the fixed fee always applies."
At Smartshares it's similar. If your balance is below $4500, they charge $40 a year and no percentage fee. At $4500 to $30,000 they charge 0.85 per cent and no fixed fee. And at $30,000-plus they charge 0.65 per cent and no fixed fee.
What all this amounts to is that Kiwi Wealth and Smartshares are still reasonably good propositions for children or others with KiwiSaver account balances of $1000 to a few thousand dollars.
Their fees will be higher than providers that charge a low fixed fee - say $23 to $35 a year - plus a low percentage fee. But obviously they will be lower than anyone that charges a fixed fee of $40 or more plus a percentage fee.
Meanwhile, SuperLife's myFutureFund does look like a good option.
In last week's column I said it's good to sign up a child in KiwiSaver. But, "because of the limitations on how the money can be used, you might prefer to make your monthly $50 contributions somewhere else. Ask the children's provider if they offer a similar non-KiwiSaver fund, from which money can be easily withdrawn."
The SuperLife product is an example of such an offering. At $33 a year, SuperLife's KiwiSaver fixed fee isn't the lowest, but it's among the low ones. And their percentage fees are also low. What's more, as you say, if you also sign up the child for myFutureFund they pay no fixed fee for that. So the total fees for the two accounts could well be the lowest available.
I'm not aware of any other provider that offers a fee deal like that. Providers - please let me know if you do.
Question: I have just read your article on KiwiSaver fees. This does not tell the full story.
My wife and I are in KiwiSaver. I opened both on the same day, and both have had identical amounts deposited into them. Both are growth funds. One is with Forsyth Barr the other Kiwi Wealth.
The Kiwi Wealth is now $3000 ahead of the Forsyth Barr account. A full 10 per cent. From what I can see - and I must admit I only look at it periodically - the fees are similar. So I conclude that the quality of investment would be more important than the fees.
Unless you can have a benchmark to check this against, you could be making a big mistake just chasing a low fee. Maybe pay peanuts and get monkeys.
Answer: Of course low fees aren't as important as returns after fees and taxes - which directly affect how fast your KiwiSaver account will grow.
The only trouble is that we can't predict future returns. This is not a peanuts and monkeys situation. High fees don't necessarily bring in high returns. In fact, there's no good way to say which funds will do well.
Heaps of research shows us that looking at past returns is not a good guide. Sometimes the funds with the highest past returns - which are often the riskiest funds - have the lowest future returns.
Because of this, I suggest you don't dwell on past returns - beyond moving out of funds that have consistently performed really badly. It's better to choose a fund with low fees, which has got just as good a chance of performing well as one with high fees. And, after fees, chances are it will perform better.
So let's look at your two funds on the KiwiSaver Fund Finder on www.sorted.org.nz. That tells us that your Forsyth Barr growth fund charges 2 per cent on an average KiwiSaver balance, while your Kiwi Wealth fund charges 1.14 per cent.
This considerable difference will help explain the 10 per cent difference you've seen in the two funds' performances.
But returns have also been better in the Kiwi Wealth fund - at an annual 8.64 per cent since April 2009. That's below the growth fund average of 9.72 per cent, but well ahead of Forsyth Barr's 6.46 per cent.
Does that mean the Kiwi Wealth fund managers are better investors? Maybe. But the Fund Finder tells us the two funds have quite different types of investments. The Forsyth Barr mix is 70 per cent shares, 15 per cent bonds, 13 per cent property and 2 per cent cash. The Kiwi Wealth fund is more heavily into shares, at 85 per cent, and also has 11 per cent in cash and 4 per cent in other investments.
If in future shares and cash perform worse than bonds and property, the relative performance of the two funds might reverse. Still, the fee difference could cancel out Forsyth Barr's advantage.
Convinced to concentrate on fees? I hope so - in which case you might want to check out fees on all growth funds in the Fund Finder. ASB charges the lowest fees, with ANZ and SuperLife not much higher. And the last two have considerably higher scores than ASB for services.
I suggest you read more about each of those funds in the Fund Finder and consider switching both your accounts to the provider that appeals most.
Question: I agree with your writer who commented that one's children should not expect to get anything from their parents once they leave home.
Some of your readers might be interested in our experiences with four children who did not expect anything from us and did not get much help when they first left, as we thought it did not harm them to struggle a little - although had they really needed help we would have done our best to assist.
However, once they needed to get a home and had children we would lend money for renovations, or something specially expensive for the family. But always we would write out a repayment scheme which they could cope with, and they would repay every month an automatic payment into our bank account, including a percentage lower than the going rate as interest.
It was all written down and signed by them, and they have all used this facility. Now I have more money I am able to lend them small sums on which I don't need to charge interest, but if needed I would take interest.
As for leaving money in my will, well I prefer to see them use my loans while I am alive. What is left can be divided evenly after my death, I don't promise anything for then.
However, I do like to take each of my grandchildren for a holiday if possible when they reach 21 years. It is a way of bonding with them and only comes once.
That is my way, but it may not suit others.
Answer: There's a lot to be said for giving or lending to adult children when they need the money, rather than bequeathing money they will - hopefully! - receive much later in their lives.
I also like your use of automatic loan repayments. Who needs the stress of chasing up a slow payer?
And the grandkids' trips are a lovely idea, which you probably enjoy as much as they do.
* Mary Holm is a freelance journalist, 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.