KEY POINTS:
Q. Can we please have a break from all the KiwiSaver questions?
Tell people to read your book or look online - there's a wealth of free advice.
Or have another, separate column dedicated to KiwiSaver.
Enough's enough.
A. I've often been tempted to answer a reader's question with, "That's in my little red book, KiwiSaver: How to Make it Work For You. It's only $9.95 - barely more than a glass of wine at most pubs and much more useful." Or, "You'll find info on that if you subscribe to www.maryholm.com"
But that would be much too pushy, so of course I would never do it!
Instead, this column is often largely KiwiSaver Q&As. And I'm sorry, but enough is not nearly enough until practically every New Zealander under 65 has signed up and everyone over 65 has helped or encouraged someone younger to take part.
That's not because KiwiSaver is perfect. Far from it. Nor do I benefit from your joining. It's the opposite actually. The more people in the scheme, the less money will be available for tax cuts or government spending that might help me or my mates. But I hate to think of people missing out on thousands of government dollars. Through my columns and seminars around the country, I've yet to hear of anyone who can't benefit from taking part in KiwiSaver at least minimally. I would be interested in readers' counter-arguments.
There are, of course, other topics to discuss. And I try to include at least one non-KiwiSaver Q&A each week - although this week I ran out of room. Next week, as a Christmas treat for you, we'll make this a KiwiSaver-free zone.
But that won't last. In the history of this column, there's never been a topic with nearly such wide interest. And it's worrying just how many people get some of the details wrong - or at least don't fully understand how to make the most of KiwiSaver. See the next two Q&As.
Q. I really just wanted to double-check my understanding around a couple of aspects of KiwiSaver.
I am enrolled in KiwiSaver, and I'd like to enrol my non-earning wife and two teenage children still at college. My wife already has an IRD number; the children do not.
What are my obligations once they are enrolled?
The idea is to make regular monthly payments of $90 each for the first year to maximise the "tax credit" and guarantee the government $1000 start-up, and then take a contributions holiday.
Is that the best way to maximise the use of the scheme in this situation?
If we were able to keep up the payments beyond the first 12 months, would that be worthwhile?
Many thanks for any advice you can offer.
A. Your plan isn't bad. But like so many school kids - I hope not yours - you could do better.
Let's start with obligations. Because none of the three is employed, they're not obliged to make any contributions, even in their first year. They will still get the $1000 kick-start as long as they belong to the scheme for a year.
If any of them gets a PAYE job within 12 months of joining, they will have to contribute 4 per cent of their pay at least until that first year of membership is up. After that, they can take a contributions holiday if they wish.
Arguably, your children should contribute as little as possible. They are not eligible for the tax credit - which matches member contributions up to $1043 a year - until they turn 18. Nor do under-18s receive compulsory employer contributions - assuming the current proposals become law in the next few weeks.
That means that until they turn 18, there's no financial advantage to their saving in KiwiSaver versus saving elsewhere. And there's a big disadvantage: generally they can't take out the money until they buy their first home or reach NZ Super age.
There is, however, a non-financial advantage. It might be good for children and teens to get into the habit of contributing 4 per cent of their pay from the start. If they do that for the rest of their working lives - perhaps regarding it as a sort of extra tax - they should retire comfortably.
For your wife, the situation is quite different. It's a great idea for her to contribute around $87 a month. The government will match that with $1043 a year - although in her first year the maximum tax credit is proportionate to how much of the July-June year she has been contributing.
And she shouldn't stop contributing after a year. With the Government putting in $1 for every $1 she contributes, her savings will grow twice as fast. That's powerful stuff.
If she gets a job, there's even more reason for her to keep contributing. Let's say she earns less than $26,000. That means 4 per cent of her pay will total less than $1043, so the government's tax credit will still match her contribution. In fact, she should bring her total up to $1043 with a lump sum contribution each June, to get the full tax credit.
What's more - assuming the legislation passes - from next April she will receive a 1 per cent employer contribution, rising gradually to 4 per cent by April 2011. From then, she will triple the money she puts in - with $1 of tax credit and $1 from her employer for every dollar she contributes.
If her pay is more than $26,000 a year, the tax credit won't fully match her contributions. But it will still boost her savings, as will employer contributions. In total, from 2011 her savings will grow somewhere between two and three times as fast.
Once the children reach 18, they are in the same situation as your wife. At that stage, it's a really good idea for them to start contributing up to $87 a month, or 4 per cent of their pay if they are working.
P.S. You can get IRD numbers for the children online - see Forms and Guides on the home page of ird.govt.nz. Or you can phone 0800 377 774.
Q. I am single, 61, and have retired from paid work. I live on superannuation payments, which are tax-paid in my hands. I have a minimal income over and above that, which is $1500 gross per year.
The super payments are $250 per week, so I'm not living on very much. But it will be okay when I get to 65 and can start drawing NZ Superannuation.
If I joined KiwiSaver - and contributed the minimum of about $20 per week or $87 per month - then as I understand it the Government provides a top-up of about $1000 per annum. Correct me if this is not correct.
My question is: How is the government-contributed KiwiSaver money to be paid out when I get to 65? Is this going to approximate $4000?
Is it provided in the form of a tax credit? Or is it paid in cash - along with the rest of the money that I have contributed, plus any accumulated capital that my KiwiSaver provider has hopefully achieved on the invested money?
The implication for me is that I pay minimal tax at this time but, in four years' time, I will pay tax on my NZ Superannuation, so I could take advantage of tax credits then.
A. I wish the Government would change the name of the so-called tax credits. It causes such confusion.
Don't think of the $1043 as a tax credit but rather as a cash gift from the Government into your KiwiSaver account, regardless of whether you pay tax. And when you take your money out, in retirement, that cash is yours, as is all the other money in your account. It is not taxed then, nor is there a credit against your tax payments or anything else that has anything to do with tax.
Okay. I'm off my soapbox now. Good on you for seeing the advantages of KiwiSaver at your age and stage. I hear of others saying, "I'm nearly retired", or "I've retired early, so there's no point in bothering".
In fact, they get a good deal, given that their money is tied up for only five years.
Speaking of which, you don't seem to realise that if you join KiwiSaver after 60, your money is tied up - and the tax credits continue - for five years after you join. You won't get your money out at 65, but 66.
There are a couple of other details you haven't got quite right, too:
* The government top-up comes in two bits. You get a one-off $1000 kick-start after you've been in the scheme for three months. Then comes the tax credit, matching your contributions up to $1043 a year - although, as noted in the above Q&A, the first year's maximum depends on when you join.
* While employees have to contribute 4 or 8 per cent of their pay or take a contributions holiday, for non-employees there is no minimum contribution - although some providers set minimums.
However, it's great if you can put in $20 a week or $87 a month and get the full tax credit.
You ask how much the government contributions will total. Over the five years, they will come to $6215.
By the time we add your contributions, you should accumulate somewhere around $12,500 to $14,000, depending on the return on your investments.
In your financial situation you might sometimes find it hard to contribute the full $1043 a year. If so, contributing any smaller amount is still good, as the tax credit will double it.
Mary Holm is a seminar presenter, author and publisher. 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.
