Mary Holm: Trimmed KiwiSaver still best bet

Those at home raising small children are among the losers in the KiwiSaver changes, but overall it's worth sticking with the scheme. Photo / Thinkstock

I'll be interested to hear what you have to say about KiwiSaver for self-employed people in the future once the tax credit situation is revealed.

The news is not great for you. Self-employed and other non-employees - including beneficiaries and people taking care of young children - will probably lose most in the KiwiSaver changes announced in the Budget. While all members will see their tax credits cut, employees will benefit from increased employer contributions.

In case you haven't caught up, the following KiwiSaver changes will take effect if the Government is re-elected:

* The tax credit will halve, to 50c for every $1 you contribute up to $1043 a year. The maximum tax credit will therefore be $521 - to the nearest dollar. This applies to the KiwiSaver year starting this July, so the first lower payments will be made after July 2012.

* From July 1, 2012, employer contributions will start to be taxed - at the employee's tax rate.

* From April 1, 2013, the minimum employee and employer contributions will rise to 3 per cent of pay.

Assuming the Government is re-elected and these changes take place, everyone under 65 who hasn't yet joined KiwiSaver will still be wise to do so. The $1000 kick-start will continue to make first-year KiwiSaver a terrific investment.

Likewise, anyone who hasn't yet bought their first home will be silly not to save for it in KiwiSaver - as long as they can wait three years. The Government hasn't changed the help for first-home buyers.

What about those already in the scheme who own their home?

After the first year in KiwiSaver, lower-income employees will see their contributions more than doubled by employer and government contributions. That's not as generous as at present, but it's still great.

For employees on higher incomes, it won't be quite such a good deal. But even for them, it will be almost impossible to find an investment of similar risk that will beat KiwiSaver.

Nor will mortgage repayment beat KiwiSaver for employees - if we make realistic assumptions about mortgage interest rates and so on.

The only ones who might, just possibly, find it better to stop contributing to KiwiSaver after the first year - in favour of investing elsewhere or repaying their mortgage - are younger self-employed and non-employees. Even then, it's unlikely there would be enough dollars in it to bother.

More on this next week. But broadly it's full steam ahead for everyone in KiwiSaver. The ship is still seaworthy, even if she's no longer a luxury liner.

Government meddling

I have not considered joining KiwiSaver. My experience is that a contract with government is no contract at all. I did forecast that governments would meddle with it and I am proven absolutely right.

My next prediction is that when enough savings have been accrued, the government of the day will again change the law so that they can be the main beneficiaries. There are so many other precedents, like superannuation, for instance.

Governments are entirely irresponsible and do not care a fig for most people. In New Zealand, the only people who count are the rich. And governments more closely resemble the Sheriff of Nottingham than Robin Hood. Lucky for them all the stench of their foul deeds are sanitised every three years by way of an election.

You and I, on the other hand, have no such way of dumping responsibility for our negligence or corruption. Lucky, aren't they.

As for KiwiSaver or anything else involving government ... NEVER.

And there I was, thinking we lived in a democracy and, if the Government didn't please most of the people most of the time, they didn't last long!

You're not the only one to predict government meddling in KiwiSaver. I've done so too, from the word go. But I draw a rather different conclusion from yours. I have always suggested everyone under 65 should join if the scheme looks good at the time, and I stick with that.

In my book The Complete KiwiSaver - published two years ago - I said government changes were "practically a certainty". My comments are as valid now, if not more so. Here's what I said:

"While a government might reduce or eliminate the KiwiSaver incentives, that would just make people already in KiwiSaver glad they joined while the going was good.

"You might find that you no longer wish to contribute further savings under new rules, but you can always take a contributions holiday. It's highly unlikely any government would take away the right to do that - unless KiwiSaver becomes compulsory.

"What if KiwiSaver is made compulsory? Presumably the government would end all incentives. Again, people who had already joined KiwiSaver would be glad they had received the kick-start and so on. They'll be much better off than those forced to join with no sweeteners.

"Another possibility is that the NZ Super age will rise from 65 to, say, 68 or 70. But it would be too politically unpalatable to do this without considerable warning. It's unlikely it would affect anyone over 50 or so at present. And younger people are decades away from getting their hands on their KiwiSaver money anyway. A few more years won't make much difference.

"After all, you should still get the KiwiSaver incentives during those years, so your savings should grow more.

"Finally, let's look at another often-expressed fear - the possibility that a future government will reduce NZ Super payments for those who have savings.

"It certainly could happen. However, it's reasonable to expect that any government would make sure savers were still better off than non-savers. They might, for example, reduce NZ Super by 50 cents or a dollar for every two dollars you receive from other savings, but I can't see them reducing NZ Super dollar for dollar. Why? Think of the anti-saving message that would send to younger people.

"Perhaps, though, you are determined to get as much as possible from the government in retirement. Even losing 50 cents of NZ Super for every two dollars of other income would rile you. I've got three responses to that:

* If you stay out of KiwiSaver, you will probably miss out on more government money - in the form of KiwiSaver incentives - than you gain in NZ Super dollars.

* A government wouldn't pick on KiwiSaver money alone. If it reduced NZ Super for those with savings, that would apply to all savings. And refraining from saving in any way at all just to keep your NZ Super as high as possible - even if it means less total income in retirement - is cutting off your nose to spite your face. A retirement funded by NZ Super alone is hardly a luxury retirement - just ask anyone you know who is trying to get by on it.

* Do you really want to enter retirement with your entire income at the whim of the government, which could reduce your payments - or fail to raise them with inflation? Far better to have your own money under your control."

I couldn't have put it better myself!

Trust paperwork stays

In your advice in a recent column to the couple with the ongoing trust expenses, you forgot to mention the coming changes that will affect their situation.

It's likely that a large part of the paperwork they mention is due to annual gifting. With the abolishing of gift duty, one last "gift" should see that cease.

To some extent. You're quite right that gift duty is scheduled to be phased out on October 1 this year.

Right after that, we can expect many family trusts to suddenly receive huge gifts of houses and so on. This is in contrast to the present practice of people giving $27,000 - or $54,000 per couple - to trusts each year, to avoid gift duty that kicks in above those amounts.

However, says tax expert John Bassett of Bell Gully, "that would still leave the cost of attending to documenting trust affairs such as the trust's transactions, banking arrangements and paying trustee fees - if any".

The annual bills might be somewhat smaller, but they won't disappear.

Provincial viewpoint

I see some ongoing comments in your column about the affordability of houses, and I thought that I would add my bit, especially with a provincial New Zealand perspective.

My wife and I built our first home in Wanganui 1970-71. We bought a half-acre section on St Johns Hill with glorious views for $3500, and added a 1250sq ft home for about $14,000, a total of $17,500.

I checked my tax return from 1971, and see that my gross income was $4125, and I paid $660 in taxes.

So by my calculation, the raw house cost was about 4.2 times gross salary and the total mortgages were 4 times salary, so our actual equity was slim.

To some extent - at least in the provinces - I suspect the multipliers today are no different. The total dollars are much greater, but the multipliers are not necessarily that much out of line in cities like Wanganui.

We sold that house nearly 17 years later in very grim economic times (1988) for $125,000 and put the net funds into this business. And so we survived.

It makes me wonder why you would bother to live in Auckland, when if one is worried about the cost of housing, there are alternatives with many advantages.

I'm impressed with your record keeping - although I hate to think how much paper you must have stored!

As for Auckland versus Wanganui, we've done that before in this column. Many people are in Auckland because the jobs are here, but the city also has its charms, and one or two exciting features not found in the River City.

Still, there's no denying houses are cheaper in Wanganui. But whether the "multipliers" quite work is debatable.

Let's simply multiply the numbers by 10, so your income is $41,250. Would your house today cost just $175,000?

A quick search on Wanganui properties for sale on Trade Me found eight out of 20 houses for sale that cost less than $200,000. However, none of those eight was on St Johns Hill. The five houses in that area were priced between $300,000 and $700,000.

Our sample is too small to draw sweeping conclusions. But they suggest that the value of your old place might have risen more than your pay.

All the same, house price inflation hasn't been as rapid in Wanganui as in Auckland - where house price rises have eclipsed income increases.

And I must say the Wanganui houses priced at $115,000, $122,000 and $135,000 in my little survey didn't look too bad.

Mary Holm is a freelance journalist, part-time university lecturer, member of the Financial Markets Authority board, director of the Banking Ombudsman Scheme, seminar presenter and best-selling 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.