Mary Holm: KiwiSaver, student loan or both

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I've just moved back to New Zealand and I have been offered a full-time position, earning $60,000.

I haven't lived or worked in New Zealand since 2005. I have a hefty student loan close to $100,000, which I have been attempting to reduce while based overseas.

Is it better for me to contribute $100 per month (based on 2 per cent of pay) towards KiwiSaver or to put the same amount towards my student loan and to try to reduce the balance?

I appreciate that there are some advantages to putting the funds into KiwiSaver, but I'm not sure if in the long run it is better.

I am 35 years old and, at the current repayment and interest rates on my student loan, will struggle to have it fully repaid by the time I reach retirement age.

I would love to read your recommendations in the column.

As in most situations, go with KiwiSaver. The incentives - the $1000 kick-start, the tax credit that matches your contributions up to $1043 a year, and the compulsory employer contributions of 2 per cent of your pay - are too good to miss.

On $60,000, your contributions will be almost tripled by your employer and the Government. And three times as much money going in means three times as much coming out again later.

In the meantime, the financially optimal thing to do in most cases is to pay just the minimum off your student loan - currently 10 per cent of your earnings above $19,084 a year.

Why pay only the minimum? Now that you are back in New Zealand, you are not charged any interest on your loan. If you have spare money after putting 2 per cent of pay into KiwiSaver, put the extra into an interest-bearing savings account and use it to repay your student loan later.

When, exactly? Well, while you've been away, the Government has introduced an incentive to repay your student loan faster than necessary, and you should make use of this - when the time is right for you.

The incentive applies if you make voluntary repayments - above the compulsory amount - of $500 or more in an April 1 to March 31 year. The Government will reduce your loan balance by 10 per cent of the voluntary repayment.

For example, if you repay an extra $900, your loan will be reduced by a total of $990. If you repay an extra $30,000, your loan will be reduced by $33,000. For more info see www.ird.govt.nz/studentloans/

At first glance it might seem that you should make voluntary payments as soon as possible, because you're not going to earn as much as 10 per cent in a savings account. But the numbers don't work that way.

The money parked in the savings account can earn interest over a number of years, compounding all the time.

And if you use that money to pay off your loan in the end, you'll get the bonus on that money anyway, as well as on the interest earned in the account.

So when should you make use of the bonus? Consulting actuary Michael Chamberlain of MCA has come up with this formula:

1. Subtract $20,000 from your salary - which in your case comes to $40,000.

2. Take 30 per cent of the remaining amount. (While I would like to think all graduates can calculate that, just in case, you multiply by 0.3). This brings you to $12,000.

3. Compare that answer to the total of your student loan. If the answer is more than the loan, pay the loan off as quickly as you can, making use of the 10 per cent bonus. If the answer is less than the loan - in your case it's far less - keep making just the compulsory loan repayments.

4. Recalculate each year. At some point, your time will come.

Here's another way to keep track of it: if your compulsory payments will fully repay the loan within the next three years, make use of the bonus to repay now. If not, wait.

Hopefully, by the time you get to the point at which you take advantage of this bonus, you will be in a position to make the loan repayments as well as contributing to KiwiSaver. If not, KiwiSaver is preferable. But try to do both.

One worry about all this is that the Government might, in the meantime, take away the student loan repayment bonus. I would be surprised if they do. But please don't blame me if I'm wrong!

Storing gold

Just a caution about storage of gold - beware the case of Goldcorp in the late 1980s.

I bought a small amount of gold as a hedge against devaluation as I was planning an overseas trip, and instead of taking physical possession of the gold, chose to have Goldcorp store it on my behalf.

As usual for the Wild West that is the New Zealand investment industry, the funds in the company shot through to line the pockets of the ticket clippers.

So I think, okay, the gold that I own (with a certificate to that effect) belongs to me, and it will be safely stored, as I had been led to believe. Haha, not so.

According to the New Zealand justice system decision, "stored on the certificate owner's behalf" means diddly squat, and the company had been free to use "my" stored gold as an investment security, which was subsequently lost in the great investing public rip-off void. That is, managers' extravagant lifestyles, Ferraris, luxury yachts, mansions and exclusive apartments.

So once bitten, I would recommend that allowing any company to store valuables on your behalf is unwise, no matter what you have been led to believe and whatever certificate is issued in your name.

Better, I think, and more versatile, to take delivery and arrange safe deposit storage with your bank. Possibly this costs no more than the fee last week's correspondent is already paying to NZ Mint. They may already be using a bank facility for storage of important documents, which is another good idea.

I had forgotten about the Goldcorp saga - which you have to admit was a while back now. And I do think New Zealand is making considerable progress towards ending the Wild West behaviour.

The changes taking effect in the next year or so - creation of the Financial Markets Authority, better regulation of financial advisers, mandatory financial disputes resolution schemes that are free to the public, and so on - should all contribute considerably to that.

Still, last week's correspondent and anyone else storing precious metals away from home should certainly give some thought to who is holding them. So, how good is NZ Mint in this regard?

"There are a couple of questions here: one, the integrity of the business, and two, the security of the storage," says Michael O'Kane, head bullion trader.

"Our agreement with precious metal depositors specifically stipulates the metal remains the property of the investor, and NZ Mint or any receiver or administrator is unable to claim ownership or deal with the property."

On security, he lists the following points:

* "The gold is physically stored in a state-of-the-art vault built specifically to hold precious metals.

* "It is fully insured, and the insurance is audited by a top-tier global accounting firm.

* "NZ Mint is unable to access the storage boxes without the owner being present or without his or her written authority."

O'Kane says many customers find it useful to store their gold with the firm, particularly if they make a lot of regular purchases. However, the majority take possession of their bullion purchases, and take care of their own security and insurance.

He adds, "We can assure your correspondent that NZ Mint is unable to use other people's gold as security for its operations or borrowings and would never consider doing so."

It all sounds pretty good. In the end, though, as you found, nothing is certain in the financial world. We could even include banks in that, although it would be astounding to hear of problems with bank safe deposit boxes - which must be safer than home storage.

Joining KiwiSaver

A quick KiwiSaver question: how long does it take to process an application to join?

I first applied through our financial controller at work and didn't hear anything for a couple of months, so I reapplied through our financial controller again three weeks ago - and still nothing!

I was not advised of any delays or difficulties at the employer end before any information was sent on to IRD on either occasion. I understand it was mailed promptly on both occasions and believe the application form was filled out correctly.

Am I being paranoid in thinking the Government is slowing things down to save a bit of money or do I have to look elsewhere for a solution to the problem?

I doubt if that's the reason. Yours is the first case like this I've heard of, and something tells me the Government wouldn't pick on just you.

Here's how the process is supposed to work. After you've filled out your KiwiSaver deduction form and given it to your employer, you should see deductions from your next pay. Employer contributions should also start at the same time.

"The employer should start making the KiwiSaver deductions straight away, and does not need to wait to receive anything from Inland Revenue," says a spokeswoman.

Meanwhile, your employer sends your details to Inland Revenue, and you are put into a default KiwiSaver scheme - but given the option of choosing your own provider.

"The vast majority of KiwiSaver applications are processed within five working days," says the spokeswoman.

"However, some can take a little longer if information received is incomplete or unclear."

During the first three months, the department holds employee and employer contributions and pays interest on them. After that, you are enrolled in your scheme, and your accumulated contributions are transferred into it, plus the $1000 kick-start. You're off!

The spokeswoman adds, "If someone has concerns about their account, or believes amounts are wrong, they can call Inland Revenue on 0800 KIWISAVER, which is 0800 549 472."

I suggest you take this Q&A to your financial controller and point out that deductions should have started straight away. You might also ask him or her to try to track down what happened to the form sent to Inland Revenue.

If that doesn't resolve it, ring the KiwiSaver line.

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 mary@maryholm.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.

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Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland