KEY POINTS:
I am a 65-year-old immigrant, my wife is 59. Ten years ago we bought a property. On a realistic basis its value should be $360,000 to $380,000. My mortgage is $105,000.
I am still working. My salary is $60,000, and I also receive NZ Super. I joined KiwiSaver 18 months ago. I pay 4 per cent and my employer pays 2 per cent. I can work another four to five years but nothing is sure in these days. My employer may encounter difficulties.
We had property back in my native country, sold it and the money was transferred here. Right now it is sitting in the bank. It is about $125,000.
We would like to do something with this money like:
Change the area where we are living and move to a better neighbourhood, or Establish a small business, or Pay part or my whole mortgage, or Buy some shares to have some passive income for my older age, or Leave it in the bank for the moment and wait for a time when the market has settled.
Even if the markets weren't so iffy, my advice would be the same: stay in your current neighbourhood and get rid of your mortgage.
Generally speaking, it doesn't make sense to have considerable savings in a bank account if you have a mortgage. By all means leave a few thousand there for emergencies, but nowhere near $125,000.
Let's say your mortgage interest rate is 7 per cent. When you pay off that mortgage, you improve your wealth as much as having an investment that earns 7 per cent, after tax. And a bank account will pay you only around 3 or 4 per cent after tax.
Another way of looking at it: you are paying 7 per cent on the mortgage and bringing in only 4 per cent on your savings. The situation is unnecessarily costing you 3 per cent a year.
What if you face an emergency? You should be able to take out another mortgage. Alternatively, you can probably pay off your mortgage but keep the facility open so you can borrow again if you have to.
The benefits of repaying your mortgage are even stronger at your stage in life. As you say, you never know how much longer you will be able to work - because of your employer's situation or perhaps your health. And it's not a good idea to go into retirement with a mortgage.
I'm assuming you are not on a fixed-rate mortgage with a penalty if you repay it early. If I'm wrong about that, depending on the size of the penalty, it might be better to wait until your fixed period ends and then repay the loan.
What about the other $20,000? I would leave it in a bank account, with perhaps $5000 as your emergency fund and the rest as the start of a savings fund. If you continue to work for a few more years, you should be able to build up the fund considerably, given that you'll have no mortgage payments. And in three years or so - five years after you joined KiwiSaver - you can add your KiwiSaver money.
At that point, you could use the money in the fund to move to a different neighbourhood - as long as you do it with no mortgage. But I suspect you might prefer to supplement your NZ Super, so you can buy a few fun things.
If you have a sizeable amount by then, consider putting some of it into a share fund, to be spent more than 10 years later. But that's too risky with money you expect to spend over a shorter period. Better to put that in high-quality bonds and bank accounts.
You also mentioned starting a small business. That can be a great way to bring in some retirement income. But don't take on anything that involves much start-up money. Too many small businesses fail, and you haven't got decades of income ahead of you to recover from that.
One more thing: at your pay level, you might want to cut back your KiwiSaver contributions to 2 per cent when that is permitted, from April 1 onwards.
Even at 2 per cent, you will be putting in more than the maximum tax credit of $1043 a year. So you don't gain anything by putting the extra 2 per cent in KiwiSaver, and you lose flexibility because it's tied up until five years after you joined.
If you happen to like the way your KiwiSaver money is invested - and I would hope you do - you should be able to invest in a similar fund, either offered by the same company or another fund manager.
However, in your circumstances the tying up of the money might not matter - in which case, let sleeping KiwiSaver funds lie.
I was interested in the item in your column recently regarding the person starting KiwiSaver at the age of 63.
I also joined at 63, and pay $20 a week from my own bank account. Also I work part time and part of that goes to KiwiSaver, so I also get employer contributions.
My question is at the age of 65, you said that the Government will still continue to pay the tax credit until five years after I join, provided I am still paying into it. If I leave work at 65, I will still have my $20 a week going into it, but will start getting paid NZ Super.
My husband tells me that if I get paid NZ Super, they will not pay the tax credit for my KiwiSaver. Is he correct when he says this?
If I cannot get the tax credit, I may take a holiday from KiwiSaver, until my five years are up.
Hubby's wrong. KiwiSaver and NZ Super are entirely separate, and don't affect each other.
Someone who joined KiwiSaver the day before their 65th birthday - the last day they are eligible - would receive both NZ Super and KiwiSaver tax credits for the following five years - provided, as you say, they kept contributing to KiwiSaver themselves.
It's a great idea to keep putting in $20 a week, which the tax credit will double.
I am 48-years-old, married with two teenagers, and all my friends tell me I should be joining KiwiSaver.
My problem is that I have an intense distrust of the Government, especially when it's anywhere near my money.
At first I thought that the Government would have little control over the funds. It seemed clear that you simply joined and chose your provider and lived happily ever after.
However, last year on the election trail John Key stated that he wanted at least 25 per cent of the funds invested in local business. My question is, what controls does the Government have over KiwiSaver funds?
None, really - if you're talking about how the money is invested - as long as there's no illegal behaviour.
You're making a mistake I've come across before - confusing KiwiSaver with the NZ Superannuation Fund. KiwiSaver schemes are run by private companies. The NZ Super Fund is government money set aside to help pay for baby boomers' NZ Super in the decades to come.
The National Party did say that if it won the election it would aim to get the NZ Super Fund, sometimes called the Cullen Fund, to invest not just 25 per cent but 40 per cent in New Zealand.
It's an idea I don't like, and not only because when the fund started the Labour Government said its managers would be free to make the best investment decisions. Other negatives about National's idea:
Any restrictions on investment mean the managers aren't free to chase the highest returns at any given risk level. Growth in the fund will suffer.
Forcing the fund to invest less abroad reduces diversification, and therefore increases risk.
The fund could become too big a player in the New Zealand markets. Its trading could push prices up or down too much.
The NZ Super Fund has also been in the news this past week for other reasons.
Finance Minister Bill English says he is considering cutting or suspending contributions to the fund, given that the Government will have to borrow to make those contributions. Others say the whole fund should be abolished.
These are issues well worth debating. But we're drifting a long way from KiwiSaver and you.
Your friends are right. You and your spouse and teenagers would almost certainly all benefit from joining - basically because of the contributions made by the Government and, if you are employed, your employer.
I refer to the comments made in your last column about loans between family members and the requirements for the interest payer to register and account for resident withholding tax.
The IRD makes the following comments on its website:
"You or your organisation must register as a resident withholding tax (RWT) payer if you pay out more than $5000 a year in resident withholding income and you pay the resident withholding income as part of a taxable activity (such as a trade, profession or business, or an activity carried out by a non-profit body or local authority), or we have issued you a certificate of exemption from RWT, or you are a non-resident but carrying on a taxable activity in New Zealand through a fixed establishment."
Generally, a family lending arrangement should not result in the borrower making the interest payments as part of a "taxable activity" (the payments would usually be made as part of a "private activity"). In addition, the other requirements mentioned above would not usually apply. Therefore, RWT does not have to be accounted for.
This requirement of a "taxable activity" is contained in S RE 4(3) of the Income Tax Act 2007.
You may want to clarify this with the IRD and in a future article.
I'm trying to! What you are saying counters what a reader said in this column last week - which was confirmed by Inland Revenue.
The department now says it needs a bit more time to think about the issue. A spokesperson has more or less promised me an answer for next week's column. Stay tuned.
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.
