Unlike earlier generations, today's tertiary students have to pay for their education. Photo / 123RF
OPINION:
Q: Some time ago, we saved some money to assist with our son's tertiary education. Admittedly, $25,000 won't go that far, but it is better than nothing.
The money sat in a bank account earning almost no interest, and we then put it into a term deposit about four years ago. Our son is in Year 12, so university is around 20 months away.
Given the low interest rate on tertiary loans, would we be better to put the money into a managed fund for say 10 years, and the gains made could offset the projected loan, rather than reduce the amount of money borrowed during the first few years of university? Or would the money be better put into his KiwiSaver account where it wouldn't be accessible until he wants to use it for a home purchase?
A: There are two ways to think about this: financially and ethically.
Looking only at the finances, the answer is easy. Let your son run up a student loan, on which he will pay no interest unless or until he goes overseas. Meanwhile, your money will be earning returns.
Over 10 years, in a higher-risk KiwiSaver or other managed fund, it will almost certainly gain value, as long as you don't move it in downturns. It could even double or more if you're lucky.
Ethically it's trickier. There are two schools of thought:
• Your son shouldn't take out an interest-free loan – which all of us taxpayers are paying for – when he doesn't need to.
• The current student generation has to pay towards their tertiary education, when it was virtually free for earlier generations. Why shouldn't they at least benefit from interest-free loans to reduce that burden? And if that means "working the system", go for it.
I can't tell you which side to be on. But I'm sure many families who are in a position to help their student offspring with fees don't do that because student loans are interest-free. Instead, they help them later on to buy their first home.
If you decide to go that route, putting the money into the young man's KiwiSaver account is a good way to ensure it's used for a home purchase, not partied away.
And if he decides he never wants to be a homeowner – a perfectly legitimate choice as long as he saves seriously so he has enough to cover rent in retirement – your $25,000 will be a great contribution towards that.
Just one word of caution about putting the money in KiwiSaver. Let's say your son takes off overseas before his student loan has been repaid. Yes, I know, OE seems like a bit of a dream these days, but surely it will return. And if the young man is overseas he will have to pay 3 per cent interest on the loan.
If the debt is left to compound, it can grow quite fast. So at that point it would be great to help your son out by repaying the loan.
You can't do that, of course, if the money is in a KiwiSaver account. If it seems likely he will venture offshore, you might prefer to put the money in a non-KiwiSaver managed fund.
Q: A letter from pension researcher Michael Littlewood: Last week you answered a reader's suggestions on "One way to bridge the KiwiSaver gulf between haves and have-nots" with what I thought were some unsupported claims/suggestions:
• KiwiSaver widens the gap between haves and have-nots: We don't know that and can't know just by looking at memberships or saving balances. KiwiSavers might be saving in KiwiSaver, but saving less (or have higher debt) in the rest of the household's balance sheet. Unless we have a proper longitudinal study of households' total finances, we can't know even whether KiwiSaver has improved or worsened overall saving rates.
• Low-income earners need to be encouraged to join: That's not necessarily a good idea. More retirement savings might be a good thing at an individual level, but less debt, more education or better occupational qualifications might be better to improve their financial resilience. Forced, locked-up retirement savings might make lower-paid workers worse off in the long run.
• Employers should be made to contribute for all staff: Australia shows that employers' forced superannuation contributions are eventually reflected in lower direct pay. Employees end up "paying for" the employers' compulsory contributions. Again, that might leave the low-paid worse off.
• KiwiSaver's rules should allow auto-increasing employee contributions: Why does the government make any rules about contribution levels? Why not let employees contribute what they like and employers contribute whatever they agree with their own staff? The government shouldn't "care" about these things.
We don't know much about the financial position of New Zealand's households. That can be uncovered only by a proper longitudinal survey. We don't know whether KiwiSaver is working or whether New Zealanders are saving "enough" for retirement.
We do know that, before KiwiSaver started in 2007, New Zealanders were probably saving, on average, more than needed for retirement. Before we start reforming KiwiSaver in 2021, it would be nice to know whether KiwiSaver is working.
A: Thanks for provoking some thought. I'll respond to your comments in order.
• I agree that we need a longitudinal study of household finances, in which several thousand people are interviewed every few years, to get an idea of how people's situations change over time.
Without something like that, we're guessing, really. Still, it would be astonishing if KiwiSaver uptake isn't higher among the better off. Also, I often hear people say they have saved more, in total, since joining KiwiSaver. And they love it. Okay, that's only anecdotal. But if we sit around waiting for research that isn't happening, we could wait a long time.
• Who said anything about forced saving? And I think you under rate the value of helping low-income people feel that they are part of the "system" and that they can look towards a brighter future.
• Yes, Australian employers almost certainly are paying less in direct pay, because they have to make super contributions. But let's assume that two-thirds of an employer's workers are in KiwiSaver. If the employer also has to pay contributions for the other one third, and therefore cuts back on future pay rises, I would expect that to affect all employees. The two-thirds would be worse off, while the one-third – probably on lower incomes – would be better off.
• I agree that employees should be able to contribute what they like. But letting employer contribution levels arise from agreements with staff is worrying. It ignores the power imbalance between employers and employees.
Also, you seem to dismiss the idea of automatic increases in employee contribution levels, which the employee could stop at any point. That overlooks the proven success of encouraging people to sign up for future increases in their saving rate. Research shows this works well.
A final point: You and I have talked often about the value of KiwiSaver, and you always come back to the comment that before the scheme started, New Zealanders were saving plenty on average.
But those last two words are very important. I want to help those with below-average savings.
Q: You need a haircut lady. Seriously.
A: Ummm? You take the prize for the most mysterious email in ages.
The subject of your email is "Have and have nots", so I assume you are referring to last week's first Q&A about KiwiSaver. But I'm afraid I don't get your point.
My online research on the slang meanings of getting a haircut found this: "Haircut is British slang for a short prison sentence. Haircut is Black−American slang for to be robbed or cheated; to be abused in some way by a woman." Not a lot of help.
If you would like to elaborate, that would be great. Or perhaps you were just looking at my photo?
Q: On the letter last week about buying and selling property in the US, seller disclosures aren't required by NZ law, and that's bad enough. However, desperate and/or pressured buyers simply ignore this, at their own peril. Once they own the house, they own its defects.
Many buyers don't order adequate inspections, and they don't read the minutes of the body corporate when buying into a multi-unit development. It's often buyers of Wellington and Auckland units who demand government (i.e. taxpayer) bailouts.
Too many Kiwis seem unable or unwilling to take responsibility for their own decisions.
The over-arching problem could be that they are part of a culture that does not adequately encourage and support self-reliance in its citizens.
Certainly, I think sellers have some level of responsibility for the condition of the house they are selling. But New Zealand house buyers are accepting – without any awareness – defects which are going to cause endless anxiety and expense.
That old saw applies: "Buy in haste, repent at leisure".
A: I agree that some home buyers don't seem to do enough homework.
A good first step is to get a copy of the land information memorandum, or LIM. An above-board seller or their agent should be happy to give you one. It summarises property information held by different departments at the local council.
The LIM "will show you the consents granted for any work on the property and information such as the flood risk for the area and the rates. The LIM will also show whether the property was part of any scheme offered by the council to retro-fit insulation," says the settled.govt.nz website, which I highly recommend for would-be home buyers and sellers.
It's also a great idea to get a building inspection, and to go with the inspector while they do their work, so they can discuss with you, on the spot, what they are seeing. And hiring a registered valuer should give you a more accurate valuation of a property than the websites that offer that service.
One big problem is that many properties are sold by auction. In other situations, a buyer can make an offer subject to a building inspection and other provisions. But not in an auction.
That means you have to go to the hassle and expense of researching the property before the auction, and it may be all for nothing. It's bad enough losing out on a house you love, without also knowing you have just wasted heaps.
It would be great to see auction sellers giving all prospective buyers a copy of a building inspection report from a reputable company.
How about it sellers – if you have nothing to hide? You could well receive higher bids because buyers would be purchasing with confidence. Maybe we could get to the point where buyers should be suspicious if a seller doesn't offer this.
On purchases involving body corporates (bodies corporate?), the Settled website says, "If you're interested in a property that is part of a body corporate, the owner must provide you with a pre-contract disclosure statement, but it is also helpful to obtain additional information such as the minutes from the last 12 months of body corporate meetings."
This coming week, August 9-15, is Sorted Money Week. There are many resources for organisations to use at tinyurl.com/NZmoneyweek. To mark the week, RNZ's Jesse Mulligan and I have created a 13-question quiz about personal finance issues, all of which come up in this column from time to time. Test your knowledge – and learn – at tinyurl.com/NZmoneyquiz.
Also, in the next few weeks I will be giving the following talks that are open to the public:
• Lessons from a financial agony aunt, CFA Society, Auckland, August 17
• Your money, Word Christchurch Festival, August 27
• An exploration of uncertainty, Great Barrier Island, September 11
• Whanganui Literary Festival, October 9. For information and to book, scroll down on the home page of maryholm.com
More online: As part of Money Week, the Herald will also be hosting a live Q&A on personal finance — at noon on Friday August 13 at nzherald.co.nz.
- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary's 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 Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.
'Debt becomes more like a rent payment that people get so used to paying.'