Mary Holm: Dying husband poses dilemma

Q. I am writing with a question regarding planning for our family now that my husband is terminally ill, and is likely to stop work for good some time over the next year or so.

There is some (not large) life insurance provision. We are mortgage-free. I have two teenaged children. One will require private school fees to be paid for three or four more years.

I have held very senior positions in small and large companies. However, I have now had three redundancies (each triggered by external events; for example, company acquisition, economic climate). I currently have no income.

My questions are in the following categories:

* Whether to continue to look for employment or take on the risk of running/starting my own business - or both.
* Insurances I should take out on my own life, health, ability to work, etc.
* Other financial safeguards I could/should put in place for my children.

A. Gosh, tough times for you and your family. Good on you for calmly assessing the steps you should take, and well done for being mortgage-free.

I wrote last week about the advantages to a family of paying off their mortgage. Your situation is a good example of why it's such a sound strategy. You don't have to spend much on accommodation, and you've got a home base that nobody can take away from you, whatever happens.

On the employment front, I'm voting for your "both". This does seem to be a risky time to start a business, given the economy and your need for income. But I hate to crush entrepreneurial spirit.

Take care with this, though. I expect your husband and children are going to need plenty of your time and attention, so it might be better to dabble rather than commit to too much at this stage.

What about life insurance? If you haven't already done so, firstly think about where your children would live if both their parents were dead - and discuss this with the people they would go to. Obviously this is important not just for financial reasons.

Then estimate how much money the kids would need until they reach independence. Include school fees and perhaps some tertiary fees. Presumably you would also like to contribute to the costs of their food, clothes and so on, to make it easier for whoever is looking after them.

Chances are that the proceeds from the sale of your house would cover all this, leaving some over for each child to take into adulthood, perhaps to help them buy their own homes. If that's the case, there's no need to get life insurance. Otherwise, get only as much as you need to cover the shortfall.

Loss of income insurance is a different kettle of fish. If you were unable to work, you probably wouldn't want to sell your house to cover expenses, so you would need a regular income.

Talk to an insurance broker about how to set up this insurance. Note that it's quite a bit cheaper if you select a longer stand-down period before the payments start. If you have some emergency savings - perhaps using your husband's life insurance - that money could cover the stand-down period.

On health insurance, unless you visit the doctor often I suggest you get coverage for just major medical expenses for you and the children. In the long run, it's usually cheaper to pay your own minor expenses. The insurance broker can discuss those options with you, too.

Beyond that? As with all children, it would be good to sign yours up for KiwiSaver, to get them started on saving for their first homes. I can't think of other financial safeguards you need. Can any other readers?

Best wishes to all of you.

Q. I joined KiwiSaver from inception date, with my first salary deductions credited to IRD on July 15, 2007. I chose Westpac KiwiSaver, to be loyal to my employer whose banking was with Westpac. I chose the Cash Fund, as I am nearing retirement (born 1952) and my risk appetite is low.

I recently looked into the performance of my Westpac KiwiSaver and was shocked and annoyed at its abysmal performance. According to IRD My KiwiSaver, contributions transferred to the scheme (from salary deductions, employer contributions, government contributions and interest paid by IRD) on June 16, 2009 totalled $14,688.

On the same date, according to my Westpac KiwiSaver, my account held 13,548 units which amounted to $14,743. Together with current balance of $151, my total funds were valued at $14,894, which meant the gain over contributions over nearly two years was a mere $206. According to Westpac KiwiSaver Scheme (under BT Funds Management), as at March 31, 2009, returns (before tax and after fees) of the cash fund were: three months 0.93 per cent, six months 2.34 per cent, one year 5.96 per cent. There seems to be a gap between the reported performance and my investment account.

I need to be more involved in monitoring my provider. My experience suggests that your readers should do likewise. Ultimately, I would like to transfer to a better-performing provider. Surely, a cash fund can't be that difficult to manage?!

A. Thanks for giving me permission to send your name to BT Funds Management, manager of Westpac KiwiSaver, which enabled them to work out what's happened. Things aren't as bad as they look, for several reasons.

Firstly, you should include interest paid by Inland Revenue in the return on your money. In your case, for some reason probably to do with start-up problems, Westpac KiwiSaver didn't receive any of your KiwiSaver money until November 2007. But that didn't matter much, as you received a tax-paid 5.36 per cent - which came to $90 - from Inland Revenue on it.

Secondly, the timing of your letter to me was unfortunate. A spokeswoman for BT Funds Management says that on that very day Westpac KiwiSaver had received some of your money from Inland Revenue but not yet processed it. They did that in the next few days, and credited the money to your account from the date they received it. "If the letter had been written the next day, this money would have appeared in his account, and his investment earnings since inception would have been $793, after fees and before tax," says the spokeswoman.

Note the "after fees and before tax", which is how the performance data is published online. However, you have paid tax of about $147 so far, so that leaves you after-tax investment earnings of $646, plus $90 from Inland Revenue.

But hang on a minute. That still looks pretty pathetic on the $14,598 that has gone into your account - after subtracting Inland Revenue's interest - doesn't it?

Well, no. It's important to bear in mind that hardly any of that money has been in KiwiSaver for two years. It has been drip-fed in over time, with some of it in the account for just the last few weeks or months. That makes a huge difference - which, by the way, applies to any drip-fed investment, not just KiwiSaver. In your case, this is exacerbated for two reasons:

* Your contributions have been increasing over time. That means the bulk of your money hasn't been in the account long enough to earn much of a return.

* Interest rates have been decreasing on the Cash Fund and pretty much everywhere else. You need look only at the three-month, six-month and year returns you quote to see that. Unfortunately, as your account balance has grown, returns on it have fallen.

Feeding some rough numbers into the Regular Saving calculator on www.sorted.org.nz suggests you have received the correct investment earnings.

Hang in there. Interest rates won't always fall. And after a few years, compounding will have had time to work its magic.

Footnote: The 5.36 per cent interest paid by Inland Revenue, mentioned above, no longer applies. The rate was dropped to 3.41 per cent on March 1 this year, and then to 1.47 per cent on June 29.

That means it's no longer painless to have your KiwiSaver money sitting around at Inland Revenue. So here's hoping it gets into KiwiSaver accounts fairly fast from now on.

Mind you, I suppose the Government could argue that it's putting lots of money into KiwiSaver, so if the interest rate is mean that is much more than cancelled out by the tax credits.

Q. I feel I must back up the landlord who wrote the recent letter about his success with tenants. I too have been renting properties for the past 30 years, and have a similar story to tell. No damage, no unpaid rent (the odd try-on, but if quickly sorted out it doesn't happen again), and the odd thank you gift basket or bottle of wine from happy tenants. At present I own the house next door and the one behind, both let to lovely neighbours who keep the properties in very good order - one an Indian family, the other a solo mum.

The trick is in picking good tenants and maintaining a good relationship with them - and presenting a good property and keeping it in good repair. Good carpets, curtains, kitchens and bathrooms are sellers.

A. That's great to hear. I guess it's the old rule: if you treat people well, they will treat you well - usually, anyway.

Q. I followed the story you had a while back regarding paying tax on family loans for mortgages, as I had arranged a loan for our house through my parents.

The tax was a nuisance to administer, so when I read there was a possibility I didn't need to pay it I was on the phone to IRD in a flash. Some time later I heard back and no, we don't have to pay it, as the money isn't being used for a taxable activity.

I am assured I will get the money paid back, to pass on to my parents. But in the meantime there's less to administer for me, and a bit more money for my parents.

A. Thanks for the feedback. It's great to know this column has made your life a bit easier and your parents a bit richer.

KiwiSaver basics

Readers often write with questions about KiwiSaver that I have already covered, and I don't want to bore regular readers with repetition.

If you have a question about the scheme, check out the KiwiSaver Basics page on www.maryholm.com. The answer might well be there.

Mary Holm is a seminar presenter, part-time university lecturer 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.