Mary Holm: It's top-up time for KiwiSavers

In February I started a new job and was automatically
enrolled in KiwiSaver. About $200 has been deducted, but
unfortunately I did not enjoy the job and have left.

Assuming I cannot find another job in the next few months, I believe
I can top up my contributions to receive a matching member tax
credit from the government.

I understand that the KiwiSaver year runs from July 1 to June 30
and that if I top it up, it is on a pro-rata basis. Can you tell me what amount I could pay in before June 30 to get the maximum benefit for this first part-year?

Also, in March my partner joined KiwiSaver and she will contribute
about $500 before June 30. Is she able to top up this amount and would it be worthwhile to do so?

The next couple of months is top-up time for many KiwiSavers who don't expect to have contributed at least $1043 to their KiwiSaver accounts between July 1 2008 and June 30 this year.

For those who joined KiwiSaver before last July 1, the situation is
straightforward.

It's a great idea to increase your contributions before June 30 until
they reach $1043.

For every dollar up to $1043, the Government will make a matching
contribution, so your input is doubled. And twice as much going
in means twice as much in retirement.

For newer KiwiSavers _ such as you and your partner _ it's a bit
more complicated. The maximum tax credit in your first year is
proportionate to how much of the July-June year you have been a
member.

Generally, it is worked out from the first day of the month you
joined. So if you signed up halfway through the KiwiSaver year, in
January, your maximum tax credit will be half of $1043, or about $523.

In your case, you've belonged to KiwiSaver for five out of 12 months.
Five-twelfths of $1043 is $435. You've already contributed $200, so put in $235 more before June 30. I suggest you do it by mid-June, just to make sure it is processed by the end of the month.

For your partner, the maximum tax credit this year is four-twelfths
of $1043, which is $348. Given that she will already have contributed
$500, she won't gain anything extra by contributing more _ unless she
simply wants to tie up more savings in KiwiSaver.

If you want more detailed info on tax credit timing in your first year
in KiwiSaver, see Incentives on the KiwiSaver Basics page on
www.maryholm.com.

The couple on $60,000 who couldn't afford to buy their first home, in your earlier column, might also consider increasing their income.

In the short term they could take a secondary part-time job; take in a boarder/flatmate/student; start a part-time business.

These options could increase their deposit and also their mortgage-paying ability, but don't have to be forever.

They should also make sure they receive all relevant assistance. For
example, they might qualify for a Welcome Home Loan. In the longer
term they could upskill and find a better paying job.

The couple might find some of your suggestions a bit condescending, as I'm sure they will have thought of them. But it's not all obvious. For example, not everyone thinks of getting a boarder or flatmate, and I'm sure many don't know about Welcome Home Loans _ so thanks for writing.

Welcome Home Loans are for people who can afford mortgage payments but don't have a deposit.

The Government provides mortgage insurance to help you borrow up to $200,000 with no deposit, or $280,000 with a small deposit. With mortgages at that level, clearly the house must be modest, especially in Auckland.

To be eligible, your household income must be less than $85,000, or
$120,000 for three or more borrowers. For more information
see www.welcomehomeloan.co.nz.

Thanks for your answer to the student loan question in last week's column. I have another student loan question.
The formula you gave suggests that I should pay off my loan ASAP.
Also I have enough money in the bank, currently earning around 3 to
4 per cent, with which I can pay off my student loan ($17,000) in full.

If I do, do I get the credit (that is, money back) for the amount the
Government cancelled?

For example, say I pay off $17,000 now, I'll be student-loan-free. If I do, will the Government cancel $1700 and I get that money back as credit at the end of this financial year, or do I get no money back as there is nothing to cancel?

Some good news for you. But first, a quick recap for other readers.

The Government has proposed a bonus to encourage people to repay their student loans faster. If you make voluntary repayments _ above the compulsory amount _ of $500 or more in an April 1 to March 31 year, your loan balance will be reduced by 10 per cent of the voluntary repayment.

For example, if you repay $800, your loan will be reduced by an extra $80.

Should you make use of this? The formula for student loan
borrowers living in New Zealand is as follows. Subtract $20,000 from
your salary and take 30 per cent of the remaining amount.

If the
answer is more than your student loan, pay the loan off as quickly as
you can, making use of the bonus.

If the answer is less than your loan, keep making just the compulsory loan repayments, and recalculate
each year.

If, for example, you earn $60,000, subtract $20,000 to get $40,000.
Thirty per cent of that is $12,000. If that is more than your loan, pay it off using the bonus.

Now to your question. I understand from Inland Revenue that student loan borrowers who repay their loan in full any time after April 1, 2009 are expected to receive the voluntary repayment bonus as a refund after the end of the tax year, next March 31.

Note, though, that the bonus is only a proposal at this stage. The
legislation hasn't yet been introduced to Parliament. Inland Revenue's responses to your and the following readers' questions are just based on their understanding of the proposal.

If you want to be cautious, perhaps you should wait until it becomes law _ presumably some time later this year.

In any case, in your situation _ assuming you live in New Zealand
and so are not paying interest on your student loan _ you'd be better
off to wait. If you repay the loan next March, you can earn interest on
your $17,000 in the meantime.

My son recently moved to work in Australia. He is interested in paying off his student loan as fast as he can as it is now attracting an interest rate of 6.8 per cent.

If the 10 per cent rebate is going to become law later this year,
should he wait till that happens to pay any voluntary amounts to get
the benefit of the 10 per cent bonus? Or, if he pays it off before it
becomes law, will he still get the benefit of the 10 per cent bonus
with retrospective effect; that is, any amount paid voluntarily after
April 1, 2009?

We would appreciate any clarification you can provide as queries with IRD have resulted in their telling us to watch the developments on the Beehive site.

Your son's circumstances are different from the person above. Because he's paying interest on the loan, the sooner he repays the better.

Inland Revenue says the following: ``Under the proposal, the voluntary repayment bonus will apply retrospectively from April 1, 2009, even though the legislation will be enacted after that date.'

Theoretically, at least, the legislation could be changed before it's passed. But _ given what the Government has said _ it's hard to imagine a change that would leave your son disadvantaged if he makes repayments now.

Put it this way: If that does happen, I will be yelling about it in this column!

I have a question about the proposed student loan repayments bonus. What happens if you overpay?

I understand that the bonus will be credited at the end of the
financial year. Say you paid back every cent you owed this month, do
they give you back the 10 per cent next year?

I am heading overseas shortly for more than 183 days (therefore
my loan will no longer be interest-free). Do I (a) repay in full and get 10 per cent back in a year's time or (b) repay the balance less 10 per cent and that will get wiped at the end of the year, but presumably the outstanding balance will gain interest in that time?

As stated above, if you repay the loan in full, under the proposal you will get the repayment bonus as a refund after next March 31.

On your second option, Inland Revenue says it is ``currently considering how repayment arrangements will apply under the proposed legislation for student loan borrowers who repay their loan balance less 10 per cent'.

If there's not a huge amount of money involved, it might be simpler to just go with your first option.

By the way, if you do choose the second option, don't simply subtract
10 per cent from the amount you owe. The maths don't work like that.

For example, if you owe $1000 and pay back $900, you will receive a
repayment bonus of $90, so you are $10 short.

You need to divide your loan by 11 and then multiply by 10. For example, with a $1000 loan, you would repay $909.09. You would
then get a bonus of $90.91 _ rounded to the nearest dollar _ which would bring you to the $1000 total.

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.

BOOK WINNERS

The following have won a copy of Mary Holm's new book, The
Complete KiwiSaver. Random House has put the books in the
mail to you.

Carol Adams, Orewa; Jean Bench, Mt Albert; Lynn Hansen,
Papamoa; Mike Hawkins, Auckland; Gareth Hughes, Tauranga; Monica Kwok, Mt Roskill; Lillian Kuan, Ellerslie; Amit Luis, Mount Wellington;
Murray McAlister, Tirau; Heather Ririnui, Otumoetai.

Thanks to everyone who took part in the book giveaway survey. Some results from the survey will be published in this column next week.