I’ve got assets worth $15m, should I self-insure? – Mary Holm

If you can afford to replace your home if it was burned down in a fire, self-insurance is an option. Photo / 123rf

OPINION

You don’t need it

Q: We have built our business for 20 years and managed to amass a net worth of about $15 million. I have for many years had life and income protection insurance and, whilst it seemed appropriate when I first took it out, I wonder if now is the right time to cancel and self-insure.

The policy now costs more than $700 per month. What are your thoughts on self-insurance? Is it a good idea and if so, at what point does it make good sense?

A: The idea behind self-insurance is that, instead of paying premiums to an insurance company, you put the money into an interest-paying bank account or a low-risk cash fund, or similar. Whenever something goes wrong, use that money to fix it.

It can work brilliantly if – and it’s a big “if” – you don’t need the money early on, when you haven’t yet built up large savings. That’s a pretty big risk for most people.

I recommend insuring against big losses, such as your house burning down. But it can make sense to reduce your premiums by choosing high excesses or longer stand-down periods and saving the difference to cover the extra payments you have to make when you do claim.

However, there’s another important point here. If you have enough money to replace the burnt house – or in your case to cover expenses if you can no longer work, or to leave dependents financially strong if you die – that insurance is not essential.

That certainly seems to apply to you. So I would cancel the policy – while being thankful it gave you peace of mind back when you started out.

KiwiSaver for stay-at-home mum

Q: I have a question regarding KiwiSaver as a stay-at-home mother of three.

My husband has already paid more than $1400 into his KiwiSaver this financial year, as he works fulltime as a teacher. We just make ends meet and don’t have any spare money to top up my KiwiSaver account with over a thousand dollars this year.

Would it make sense to pause my husband’s contributions (and the employer match as well) so that we can direct that money into my KiwiSaver until I get the amount required for the full government contribution?

A: Women tend to have lower KiwiSaver balances than men. That’s partly because they are more likely to take time out from work to raise children – although lower average pay and a tendency to save in lower-risk funds with usually lower returns also contribute.

So I would really like to see you putting $1042 a year into KiwiSaver to get the maximum $521 government contribution. It won’t nearly match your husband’s contributions, but it all helps.

However, your idea isn’t a great way to do it. For every dollar your husband puts into KiwiSaver, his employer puts in either 70 cents (if he earns $57,600 to $84,000) or 67 cents (if he earns $84,000 to $216,000), because employer contributions are taxed.

Meanwhile, for every dollar you put in, the Government will put in 50 cents. So your family’s total KiwiSaver contributions would be lower.

Can I suggest – without you getting cross! – that perhaps you can actually manage to do both? Set up an automatic transfer from your bank account to KiwiSaver of $30 a week. You probably won’t miss it. And if you do it now, your contributions should total about $1042 by next June 30.

After that, you can switch to $20 a week and still reach $1042 by June 30 the following year – although I would love to see you continue at $30.

If you really can’t afford $30, start with $20 a week, or even less. The Government will still put in 50 cents for every dollar you put in. But do try to inch the amount upwards each month.

Government not that mean

Q: I’m 62 and currently having cancer treatment. I have not been able to work for several years so recently withdrew $10,000 from my KiwiSaver account. If I still keep making a weekly $25 contribution, am I still eligible for the government bonus this financial year?

A: That would be really mean if the Government withheld its contribution to people who had made hardship withdrawals. And it doesn’t.

As mentioned above, $20 a week is actually enough to get you the Government’s $521, but if you can manage $25, that’s all the better.

Good on you for continuing with your contributions. They do add up. And here’s to a good health outcome for you!

It didn’t convince me

Q: Mary, I suggest that you read Steven Joyce’s well-informed and well-reasoned argument against a capital gains tax (CGT) in last weekend’s Herald.

I was skeptical and like, “Here we go”, expecting some propaganda before I read it. But frankly, it completely changed my mind on the issue.

A: It didn’t change mine! Steven Joyce – who is a former National Minister of Finance – made two main arguments:

• A CGT shouldn’t apply to a family home. But what about a bach, family farm, small businesses and so on? If those are also exempt, there might not be much left to tax. My reply is that the exemption should stop with one family home. We’re not talking about taxing away all the gain on these other assets, just a portion of the gain. People will keep most of it. And at the same time, their income tax will be reduced.
• “The more you tax, the more you stifle economic prosperity ... the solution is not more tax.” My reply: We’re not talking about increasing total tax, but moving some of the tax burden from people who work for their income to people whose income comes from their asset values growing – ideally only if they grow by more than inflation. Total tax need not be higher.

While I agree that we don’t want to discourage people from starting a business, it’s hard to imagine someone saying: “I would like to go into business, but if I do well, somewhere down the line some of my gain will be taxed, so I’m not going to bother.” Look around the world. The presence of a CGT in every country we compare ourselves with doesn’t seem to stop business development.

I also agree with Joyce that New Zealand needs to improve productivity. But I can’t see how the introduction of a well-designed broader CGT would affect that.

While we’re on articles about CGT, I was just re-reading one by my colleague Liam Dann. On October 6 he wrote that 77% of New Zealand business leaders said in the Mood of the Boardroom survey that we need to have a debate about CGT, and that “a lot of senior financial market and business leaders support the idea”.

But the part of the article that really caught my eye was this: “I’m not especially passionate about [CGT]. There’s no chance of one being implemented by the current Government.

“I’m about as emotionally invested in it as I am in the upcoming Black Caps cricket tests with India. Hoping we win the series is a waste of energy. But let’s see if we can make some small steps in the right direction and build the strength of the team.”

His article concluded, “Small steps ... one day we’ll win that test in India.”

Since then, of course, the New Zealand men’s cricket team did beat India. This country can do anything – even introduce a good comprehensive capital gains tax – or land tax or estate tax, or ... let’s work on it.

Do-upper should be taxed

Q: The suggested capital gains tax should in my opinion take into account those who have a history of trading in homes they live in for a short period, and by so doing make a large untaxed capital gain. As you state, houses have in the past increased in value at a much higher rate than the CPI rate.

An example is a friend who left school at 15 but was made wealthy by buying and selling her home every year or so after making small improvements in the decor or the garden, and then living on her capital gains, which of course were not taxed.

The difficulty for the IRD and the politicians who make the law is to differentiate between the genuine person who moves because of family or work circumstances and those who choose to do so to often make a large untaxed profit.

A: Many of us know people who trade homes in the way you describe. And whether or not they pay tax on their gains, legally they should.

It’s true that, if you’re buying and selling a family home that you have occupied, usually there are no tax consequences.

But Inland Revenue confirms that if you buy a home with the intention of selling it again – even if it’s not the only reason for the purchase – and you have established a regular pattern of buying and selling houses, your gain is taxable.

This applies no matter how long you keep the property. It has nothing to do with the bright-line test. For more info, go to ir361-2024.pdf.

Still make a will

Q: I work in mental health, providing support to people who are in mental distress and/or suicidal. A guest has asked us what to do about their will when they have no next of kin that they recognise (as next of kin).

They approached the Public Trust but got no real advice. This is something that is likely to come up again, as we support a number of people who don’t have anyone else in their lives that they consider next of kin.

A: That’s sad to read, but still it’s a problem that needs to be addressed. If someone doesn’t write a will, under the Administration Act 1969, their assets are likely to end up with relatives, whether they want that to happen or not.

So I strongly recommend they do draw up a will. If they don’t have the money or inclination to hire a lawyer, perhaps you could help them write a simple will online.

They could leave their assets to a friend or someone who has helped them, or to a charity. If they can’t name a charity, talk about what matters to them – such as the welfare of people in poorer countries, or New Zealanders with particular challenges, or animals, or the environment – and then help them find a suitable charity.

PS Good on you for the work you do.

Students v superannuitants

Q: I disagree with a recent letter stating rich people are more entitled to NZ Super than a student is entitled to a student loan. Let’s assume neither actually needs the money.

Firstly, the student loan has to be repaid, NZ Super doesn’t. Every pay the student receives for the foreseeable future will have a loan repayment deduction, making it tougher to pay monthly bills or mortgage payments.

Secondly, both NZ Super and the student loan are given to everyone who qualifies, and while neither may need the money, both are equally entitled to it. Just as both are equally entitled to the same healthcare as others.

Who would you rather the money went to, a student starting out in life earning a low graduate salary, trying to make ends meet and start to build up some assets, who still has to pay the loan back, or a rich over 65-year-old who will probably use the NZ Super income to help pay for their next overseas holiday and never has to pay it back?

A: When you put it like that ...

But I’m not sure the entitlement is quite so clear for a student who doesn’t need the loan money.

Studylink says: “A student loan helps to pay for your course fees, study materials (eg books or a computer) and weekly living costs.”

Still, the Government doesn’t ask students to prove their need – which would be a time-consuming and expensive exercise. So I suppose it’s true that anyone who can get a loan is entitled to it. And you make an important point about loan repayment.

Remember, though, that this series of Q&As started with a parent writing about their daughter using unneeded student loan money to save for a house deposit. It’s not clear that that’s fair while a young non-student doesn’t receive interest-free government money.

Gosh, this fairness stuff can get complicated!

* Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions 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 mary@maryholm.com. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.