KEY POINTS:
Have you discussed the pros and cons of this PIE investment opportunity that all the banks are advertising?
I have just put a significant amount from my savings account into a cash fund which my bank investment adviser said was just the savings account wrapped in a tax break, no difference at all.
And most importantly for me, it has the same risk attached. (I am a very "low-risk" person).
The pros of PIEs - or portfolio investment entities - far outweigh the cons. In fact, I'm struggling to think of a con, as long as your money is as accessible as you want.
PIEs, which came into being in October 2007, are managed funds. They include almost all KiwiSaver funds and many other savings funds as well as vehicles similar to savings accounts and term deposits.
Many PIEs that invest in cash - probably including the one you have invested in - are likely to be covered by the Government's new deposit guarantee scheme.
They are eligible to be included as long as:
* "They invest exclusively in New Zealand Government securities or debt securities issued by institutions covered by the Crown guarantee, and
* "They do not increase their investments in guaranteed institutions that are not registered banks beyond the level that existed as at October 12, 2008."
The second requirement is to stop a cash PIE from taking advantage of the situation by boosting its investments in finance companies covered by the guarantee, which are likely to pay higher returns.
It's taking a little while for the Government's guarantees to be put in place, but I suggest you ask your bank if your PIE is likely to be covered by the guarantee. If not, move to a cash PIE that is covered.
Non-cash PIEs, which invest in other assets such as shares, corporate bonds or property, won't be covered by the guarantee scheme.
However, all PIEs have the following other attractive features:
* The highest tax rate for any investor in a PIE is 30 per cent. This is helpful to people earning $40,000 to $70,000, who normally pay 33 per cent, and particularly good for those earning more than $70,000, who normally pay 39 per cent.
* Lower-income investors will in most cases be taxed at 19.5 per cent on their PIE income. This is of some help to those earning $14,000 to $40,000, who normally pay 21 per cent - although those earning less than $14,000 would be worse off in a PIE investment.
* What's more if, in any of the two prior years, your non-PIE taxable income is below $38,000 a year, and your total taxable income including PIE income is below $60,000 a year, then all of your PIE income will be taxed at 19.5 per cent.
It sounds a bit complicated, but think it through. If it would apply to you, it could mean big tax savings.
* A PIE that invests in New Zealand shares and/or in most large Australian listed shares won't be taxed on capital gains on those shares, even if the shares are traded frequently.
In the past, schemes that traded frequently did pay tax on that income. Managed funds that haven't become PIEs still do - as do some direct investors in shares.
* If you don't currently have to file a tax return, being in a PIE won't change that. You are taxed in much the same way as bank savings accounts are taxed. The money goes to Inland Revenue without your bothering about it.
* As long as your PIE income doesn't have to be declared on a tax return, it won't affect entitlements such as Working for Families, child support, or repayments on student loans. This could make a big difference to some people.
You may have noticed that the PIE cutoffs, at $38,000 and $60,000, are different from the new income tax cutoffs, at $40,000 and $70,000. That's because managed funds need time to adjust their systems to accommodate the tax cuts, says a Treasury spokesman.
The Government is considering adjusting the PIE rules to line up with the tax changes, but it "has not made any decisions on how or when the PIE rates would be changed", he adds. Any changes are likely to make PIEs even more attractive for many investors.
I would appreciate your views on my situation regarding my investment properties.
I am a single parent with two school-age children. I work part-time as an accountant. My income is regular but not great as I work around the needs of the family.
I own my own home. This is unencumbered.
In addition I have 20 per cent equity each in three investment properties - purchased in March 2005, November 2005 and March 2007. There's a total of five income streams, as two of the properties are home and income properties.
All of them are professionally managed and are currently tenanted. Because of my equity in these properties, I am still managing to service the loans without too much problem although they're still not cash-flow positive.
Even though my back is not against the wall and I'm not in a desperate situation, should I sell the third property (since this was purchased last at a relatively higher price than the other two), and hope to purchase another one as the prices come down? Or should I ride out this downturn and continue to service the loans?
I wouldn't recommend trying to time the property market, by selling now and buying more cheaply later.
For all we know, property prices might not go down much more. By the time you pay real estate agent's commission, legal costs and so on, and probably lose some rental income during the transition - to say nothing of the hassle - you could end up worse off.
That doesn't mean, though, that you shouldn't consider selling a property. Why? You've got pretty high debt in a time of economic uncertainty. If you sold one property, you could slash the mortgages on the other two.
At the risk of being depressing, it's often good to do a worst case scenario.
What if you lose your job and find it hard to find another that pays as well? Or your expenses suddenly rise, perhaps because one of your children develops a problem? Or one of your tenants moves out and can't be replaced for a period? Or you suddenly find you need a new roof or some other expensive maintenance on one of your rentals or your home - or for some other reason you haven't got enough money to service your three mortgages?
You could always put one of your properties on the market then. But you would be selling under pressure, probably in a slow market. It's horrible to see what a desperate seller can end up settling for during tough times.
It's not at all far-fetched to say you might end up owing the bank more than you get for the house. You'd be left with a debt and no compensating asset.
Only you can assess the likelihood of hard times coming. If it's really remote - or if you have a family member or someone else who could help you through a bad patch - you are probably best off riding out the gloom. But if your situation is slightly precarious, it would be good to sell a property now - making the most of the fact that you are not desperate.
Which property? Not necessarily the last one bought. The money you paid for your properties is a sunk cost, and it's probably irrelevant to what your best move is now - although you may want to check that with your accountant.
Assuming that is correct, one idea is to put all three properties on the market, at fairly high prices by today's standards, and accept the first decent offer.
This will disrupt your tenants, and you may want to give them a break on their rent while the property is being marketed. But it could well be worth it to have three chances at selling.
When the economy and house price trends settle back down, you could always venture back into the property market - although I would rather see you diversify away from such heavy concentration in one sector. How about some shares or share funds, bonds and so on? It would be good to be at least in KiwiSaver, to get your share of the taxpayer money going into the scheme.
READERS ON KIWISAVER
Here are some of the winning entries in the Herald's Money Column giveaway of my new book, KiwiSaver Max: How to get the best out of it. To enter, readers had to say in 50 or fewer words what they think of KiwiSaver - good, bad or both.
KiwiSaver is a "too good to be true" product. There should be a heck of a lot of good reasons for not taking it.
Ruby Mardiono, Pinehill, Auckland
Mary's comment: We've always been taught to be wary of "too good" investments. But in this case that doesn't apply. KiwiSaver is so good mainly because the Government is giving KiwiSavers money - as well as partly funding employer contributions. You'd be silly not to get your fair share.
Flexibility. Beneficiaries can join. This gives them incentive and the knowledge that even unemployed they can earn money. They feel better. Gives them confidence. Great for grandchildren. I am helping mine to join while they are at university. That way I know handouts I give them are not frittered away.
J. Walker, Tauranga
Not sure what I think yet, but having the Government put in $1043 a year plus a 1 per cent employer contribution is all good, and that will go up each year to 4 per cent. I worry that when I turn 65 the money will have "disappeared" and I'll never get it back.
Tonya Drabble, Eastbourne, Wellington
Mary's Comment: That's extremely unlikely. KiwiSaver funds are quite different from finance company investments. Your money isn't invested in the provider's business, but in separate assets, with trustees checking that happens. And the Government Actuary keeps a watch out for any funny business.
Mary Holm is a seminar presenter and author. 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 give financial advice.
