Mary Holm: Let's make most of KiwiSaver

KiwiSaver may not be as gold-plated as it was but it still has lustre. Photo / APN

You said in the paper that KiwiSaver is changing from a gold-plated scheme to a silver-plated one. Silver tarnishes.

This scheme won't last and will be altered progressively until it is dark grey with Ag2S and won't attract anyone. That is where you are wrong.

You certainly know more chemistry than I do. I had to look up Ag2S, which is silver sulphide, the black stuff that tarnishes silver.

Something tells me, though, that you are not quite so savvy about savings schemes. The current Government - and surely every future one - won't harm KiwiSaver too much for two reasons:

* It won't be long before more than half of all voters are in KiwiSaver. And many others over 65 have family members in the scheme.

* Governments want people to save, to help our economy.

Dodgy proposal

Interesting to see you trying to justify KiwiSaver after the Budget changes chipped away at some of its supposed advantages over other forms of investment.

Any investment that needs Government favours to look good is always going to be a dodgy proposal.

Why would any sensible person give their money to someone else to manage? Add politicians' involvement and the whole thing was never going to be as good as you and others earning money to tout it said it would be.

Steady on. I don't tout KiwiSaver.

I have written some books about the scheme. And while they've all included the negatives of KiwiSaver, I suppose you could argue that when I encourage people to join the scheme that might boost book sales.

But - whether or not you want to believe it - that's not why I do it. I want to help New Zealanders to do the best they can with their savings. If I were motivated by making lots of money, I wouldn't be a columnist and author!

I agree with you, though, that KiwiSaver's strengths are the "Government favours" - including the requirement that employers make contributions. Without those incentives, the scheme wouldn't be anything special.

But we might as well make the most of them. And given that the incentives all apply upfront - when you put your money in - you don't lose if politicians later reduce the incentives.

Most people's first contributions to KiwiSaver - in 2007-08 - were doubled or more by government and employer contributions. Since then that 2007-08 money has sat in KiwiSaver accounts earning whatever the fund earns - regardless of any rule changes. Same with the contributions in 2008-09, 2009-10 and 2010-11.

If you no longer like KiwiSaver because of Government changes, you can stop contributing. But you still benefit from the past incentives. Your savings in KiwiSaver until now are two or three times bigger than they would otherwise have been - which means you will have two or three times as much in retirement.

From next year on, the multiplier will drop to 1.5 to two-plus times. But it will still be really hard for any other investment to do as well, even if its annual returns are considerably higher.

As for why someone would give money to others to manage, good question. I don't have faith in anyone's ability to pick shares, bonds, property or whatever, which is why I put almost all my retirement savings in index funds. Nobody picks how they invest - the funds just go into all the investments in an index.

That makes index funds cheap to run. And you get much wider diversification and much cheaper transaction costs per share or bond than you would get yourself. What's more, the fund managers do all the paperwork for you.

I doubt, though, that I will ever convince you. Goodo! That saves the Government some money - and therefore me as a taxpayer.

Changes to tax credit

Under the KiwiSaver changes announced in the Budget, what is the maximum tax credit that can be claimed next year?

As the changes will take place before the election, they will come in partway during the "KiwiSaver year". So for the year July 2011-June 2012, will the maximum tax credit be the whole $1043 (if you make a matching payment before the changes take effect), or will it be the $521 that applies at the end of that year? Or will they pay $20 per week up until that date and $10 thereafter?

The lower tax credit takes effect earlier than you think - from July 1, 2011 - so it applies for the whole 2011-12 KiwiSaver year.

Assuming this Government is re-elected, or a new government doesn't change it, the reduced tax credit of up to $521 a year will be paid out in July or August 2012.

However, that won't affect how much we should contribute. It will still pay to put in at least $1043 a year.

Contribution options

I see that you think that KiwiSaver is still a good deal, but I am not so sure. I know that my employer considers its KiwiSaver contributions to be part of my overall salary package. Other employers may not be so explicit, but I am sure that it enters their calculations.

With the removal of the tax exemption on employers' contributions, the only remaining incentive to be part of KiwiSaver is the $10 a week Government contribution. This is hardly fantastic given that your savings may be locked up for 30 years or more.

While I will continue to contribute to KiwiSaver - mainly out of inertia - in its current form it won't do much to increase our savings rates.

I think there needs to be some tax incentive for people to save, even if it's at the margin, like taxing contributions at the PIE rather than PAYE rate. Many other governments are much more generous.

And how does a government cope with lower revenue because of the tax incentives? By increasing taxes elsewhere.

What's more, tax incentives help higher-income people more, whereas the confusingly named KiwiSaver tax credit - which actually has nothing to do with tax - is worth the same to everyone. Tax incentives also distort investment decisions. Overall, I'm not all that keen.

I think, too, that you've gone too far in your argument about employer contributions.

Employers such as yours include KiwiSaver contributions in their salary package. A KiwiSaver member's pay is reduced by the amount of their employer contribution - so you could say they pay their own employer contribution. This is sometimes called total remuneration.

Other employers - I suspect the majority - don't do this. And while those employers probably give smaller pay rises because KiwiSaver exists, the smaller rises would usually apply to all employees, not just KiwiSaver members. So it's clearly better for their employees to be in KiwiSaver, to pick up the extra money coming from the employer.

However, for people in your situation you're quite right - with the end of the tax break on employer contributions from April 2012, you don't gain anything from those contributions over saving the money elsewhere. What to do about it?

Given that you seem concerned about tying up your savings, your best move is probably to take repeated contributions holidays from April 2012 on.

Still contribute $1043 a year directly to your KiwiSaver provider, to pick up the $521 tax credit. But put the rest of your savings into repaying a mortgage or other debt or - if you have no debt - a non-KiwiSaver investment that you can access when you want to. Because you're on a contributions holiday, you'll get more in the hand from your employer. To end up with as much in retirement as you would have saved in KiwiSaver, you need to add that extra money to your savings.

I suggest you set up an automatic transfer to your investment or debt repayment, the day after payday. If you've found a KiwiSaver fund you like, ask the provider if they have a similar non-KiwiSaver product. Many do, and in some cases the fees are a bit lower.

Other employees on total remuneration packages should not follow this advice if:

You haven't yet joined KiwiSaver.

* The $1000 kick-start makes it still well worth joining and contributing for a year.

* You haven't yet bought your first home. You can't beat KiwiSaver for saving to buy a first home - especially if you qualify for the Government subsidy of $3000 to $5000.

* You are not disciplined about saving. For this idea to work, you must not dip into your savings.

Okay, enough about KiwiSaver. My inbox is overflowing with questions about it, but the anti-KSers will yell if we don't have at least one Q&A about something else. But there will be more next week. This topic is suddenly hot again.

Exchange-rate pitfalls

I have £100,000 in a foreign currency account earning no interest. It's been there for about a year and a half. This is inheritance money and I am due another payout shortly of around £40,000.

I have left it there because the currency exchange is so low I would lose $50,000 give or take, if I were to exchange it at today's exchange rate.

If, however, I leave it hoping the New Zealand dollar loses value - sorry, the UK pound gains value - then I will gain far more than any interest rate could give me in the time period.

I am thinking of leaving the next payment in the UK, but the situation is not a lot better there.

Assuming you plan to spend the money in New Zealand, bring it over in dribs and drabs, starting now.

When you say you would lose $50,000, you must be measuring against the exchange rate at some particular date. Switch to another date, and it will be a different story. The point is that no date is relevant except today's date. Your inheritance is currently worth x dollars - regardless of what happened in the past. You are hoping the future exchange rate will move in your favour, but it could just as easily move against you. Exchange rates are notoriously hard to forecast.

It's best, therefore, to make a plan to move money between countries bit by bit. Then at least you'll transfer some of it at what turns out in hindsight to be a good rate. You might, for example, move a quarter now, a quarter in six months or a year, and so on.

But don't drag it out for too long, while you wonder and worry. Life is short. Get the money over here and enjoy it.

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 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.