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OPINION
Q: I’m a 16-year-old high school student who recently was very lucky to inherit a five-figure sum. I expect to need the funds within a couple of years for university, and I planned on investing in a term deposit now that the rates have improved.
My bank, ANZ, will not allow a 16-year-old customer to open a term deposit. I can only open it under my parent’s name, which would obviously attract their higher PIR (tax rate).
I already have KiwiSaver and a retail investment fund under my name.
Can you please recommend what short-term investment a 16-year-old could open which wouldn’t be restricted by these age-related limitations.
A: Lucky you inheriting that money at a time when you can use it well, for study.
You’re wise to seek an investment that is taxed at your rate. Let’s say you’ve inherited $50,000, and you invest it at 5 per cent. You will receive $2500 a year before tax.
If you are taxed at your rate, presumably 10.5 per cent, you’ll get $2237.50 a year. But if your parent’s tax rate is 33 per cent, you’ll get $1675, and at 39 per cent you’ll get $1525. I’m sure you can find a good use for several hundred more dollars a year.
And yes, term deposits are attractive these days. The good news is that you can get one at another bank.
I asked the mainstream banks if they offer term deposits to 16-year-olds. The following said yes: ASB, BNZ, Heartland, Kiwibank, Rabobank, SBS and Westpac.
Most said a parent’s involvement was needed, in some cases for younger children only. But all said the interest would be taxed at the young person’s rate.
Why is ANZ off the list? “This policy is related to the nature of the product and ensuring customers understand that their funds will be inaccessible for a fixed period of time,” says a spokesperson.
“However, we are reviewing our position on this. If we were to allow minors (from 13 years) to open a term deposit we do need to consider what further education would be required to ensure the product was suitable.”
She suggested you could invest in one of ANZ’s diversified funds in your own name, “with a parent/guardian attached to their account with signing authority”. In these instances, the PIR would be that of the 16-year-old, i.e. the lower tax rate. Signing authority for the account automatically transfers to the 16-year-old when they turn 18.
But you already have a managed fund investment. In any case, I wouldn’t recommend you use any fund other than a cash fund, given that you plan to spend the money in a couple of years, and ANZ doesn’t have a cash fund.
Cash funds invest only in term deposits and the like, and investors’ balances should never fall more than a smidgeon — whereas they can fall considerably in any other fund over a few years.
If you want to look into cash funds, use the Smart Investor tool on sorted.org.nz. Look at defensive non-KiwiSaver funds with “cash” in their names, and check that they invest only in cash.
However, these days their returns have been considerably lower than on bank term deposits — although that could change in future.
Another option is bank savings accounts. But again, they don’t tend to match term deposit returns currently.
So the best idea is to open a term deposit with another bank. Which one, out of those listed above? The obvious answer is the one that pays you the highest interest. That changes all the time. See interest.co.nz.
But you might also take other factors into account. There are two ways I suggest you judge a bank:
Fitch gives Kiwibank its highest NZ rating, at AA, followed by ANZ, ASB, BNZ and Westpac all on A+. TSB is A-, and the Co-operative Bank, Heartland and SBS are BBB. Rabobank is not rated by Fitch but S&P gives it an A. You can read more about the different banks’ financial strength on the Reserve Bank website here: tinyurl.com/BanksNZ
If the Government’s Depositor Compensation Scheme, which will basically insure deposits of up to $100,000, was already in effect, then all of this wouldn’t matter as much. But it’s not now expected to be up and running until late next year.
“Some delays in moving the Bill through the Parliamentary process and the upcoming election has meant the original timeline has been pushed out,” says a spokesperson for Finance Minister Grant Robertson.
In the meantime, the experts say none of these banks seems financially wobbly. Still, you might prefer one of the strongest banks.
The two lists are almost opposites — although Kiwibank does pretty well on both. Up to you!
More on banking for children next week.
Q: I’m a mortgage adviser. With regard to your response to last week’s letter titled “Reverse mortgage help”, can I suggest rather than a reverse mortgage, it would be much cheaper and potentially less risk to be a guarantor on a loan for the couple’s children.
I would hate to think they are paying 9.5 per cent interest themselves rather than the children paying circa 6.5 per cent.
A: I take your point about interest rates. But I don’t think your idea would work for this family.
The reader said, “We have an adult child with children who is working his socks off but will never manage to save enough for a deposit for his own home”. In that situation, having the son’s parents guaranteeing a loan wouldn’t be enough for him to get that loan. The son needs money, and his parents taking out a reverse mortgage is one way to get it.
I also have concerns about parents — or anyone else — guaranteeing a child’s mortgage. If the child stops making mortgage payments, the lender will go after the guarantor to repay the loan plus any interest that has accrued.
This can mean the guarantor has to sell their home and sometimes also other assets. And it tends to happen later in life, when the parents can’t start all over again financially. I’ve heard some terribly sad stories.
The tricky part with mortgage guarantees is that the child — and often their partner — may be reliable and responsible, and it seems inconceivable that they would put their parents in that situation. But bad stuff can happen out of the blue — a job loss or a relationship break-up or a business going wrong.
Not only can that leave the parents in big financial trouble, but it can also destroy family relationships.
With a reverse mortgage, on the other hand, the parents can give their child a fixed amount, say $100,000. When the parents die or move out of their home, the reverse mortgage lender is repaid, plus compounding interest on the loan. There are no horrible surprises. Everyone knows where they stand.
Q: I work as a volunteer budget adviser and I’m also a mortgage adviser.
Heartland only lets you refer a client to them for a reverse mortgage, which they pay you $500 if the client draws down.
They then send the applicants to a lawyer to have them explain the product and get it signed off that they understand it. Then they proceed.
I see a lot of clients at the budget service that are asset-rich and cash-poor. They often need money for roof repairs, maybe a new heat pump etc. If a reverse mortgage keeps them in their own house, I don’t see too much of a downside.
The most opposition always seems to come from the kids thinking of an inheritance — same as with parents going into a retirement village: “But we will lose 20 per cent.” Hello, it’s not your money! Your parents earnt it. Let them spend it to enjoy the lifestyle they want.
A: It’s distressing to hear of that response from family. In my opinion, adult children with that view don’t deserve much of an inheritance anyway!
I largely agree with you that reverse mortgages can work well, especially for people later in retirement — as long as they understand how fast the loan can grow, with compounding interest at pretty high rates, over a few decades.
A few weeks back we had a Q&A about a couple whose reverse mortgage had grown to the point they could no longer afford to sell their house, pay back the loan and move to the retirement village of their choice. Not good.
It was interesting to read that Heartland pays advisers $500 if their clients take out a reverse mortgage. The bank confirms that happens for “certain eligible independent mortgage advisers”. I also asked the other main provider of reverse mortgages, SBS. They pay mortgage advisers a $1000 referral fee.
Both banks require customers to get independent legal advice, and recommend independent financial advice as well.
Heartland also recommends that the customer “discusses the matter with their family to consider other options which are available to them”. And SBS says, “We also encourage members to talk it through with trusted family members, who they may wish to bring to meet with our team to discuss the product and alternative options to help fund their needs during retirement, and consider if it is the right product for them.”
PS. Good on you for volunteering as a budget adviser. I’ll be writing about this service soon.
Q: On your Q&As last week about market dips, Bernard Baruch said, “Always buy your straw hats in the winter”.
A: Thanks for a much more colourful way of putting what I said about buying strawberries — and perhaps shares — when they are cheap.
Bernard Baruch was an American financier and statesmen who made many wise comments about investing, including:
This week, the Government announced that the Commerce Commission will look into personal banking. I get heaps of letters from people unhappy about how their bank has treated them, but most of us don’t take the big step — switching our main business to another bank.
I did it years ago, and it was a nightmare, with some automatic payments going out of both my old and new banks and some going out of neither, accompanied by threats of power being cut off for non-payment.
I suspect many people worry about a similar shemozzle.
However, things have apparently improved. The Banking Association said this week, “Switching banks is easy. Your new bank can arrange everything including transferring your funds from your old bank and setting up your recurring payments to your new accounts. This can be done within five working days, and you don’t even need to talk to your old bank”.
Is it really that easy? Let’s hear from readers who have switched their main banking in the past 12 months – including those who found it straightforward.
Please stick to the 200-word limit. I will run some letters in the column, and forward all of them to the Commerce Commission, so let me know if you want me to remove your contact details first.
- 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.
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