Money matters: Waste no time on tricky schemes

By MARY HOLM

Q. My wife and I have been approached by personnel from the [name withheld] property investment company, with a presentation on the ways and benefits of purchasing a property from them for investment purposes, in terms of tax rebates.

The presentation was impressive and lucrative.

As we are not 100 per cent sure how the tax rebates work, as far as investing in the purchase of a property by leasing out is concerned, is it possible for you to elaborate further on this subject?


A.Not really, although that's not for want of trying.

Some months ago I went to a presentation by this company, as a friend wanted my opinion on it.

I spent a couple of hours there, including time in a small group in which we could ask questions. I ended up confused.

Because of that, I can't say for certain whether the investment would be good or not. That's why we aren't publishing the company name in your letter.

I can say, though, that I wouldn't go near an investment that takes more than a couple of hours to understand.

I'm also wary of any scheme that relies on tax breaks to work well.

And that's particularly true these days. The Government is doing a broad review of the tax system, looking into such issues as the uneven taxation of different investments.

Another cause for concern is simply that the investment looks, as you put it, lucrative. That must mean it's risky. If it wasn't, the people running it could attract enough investors by offering medium returns.

Why would they offer higher returns than they have to, when they could keep more for themselves?

If, despite all this, you're still interested, ask the company to put you in touch with some investors who have been with them for more than a couple of years and are not related to anyone who works for the company.

If they come up with someone, ask them about everything that worries you. But I wouldn't waste time making a list of questions in advance.

I've asked several promoters of apparently lucrative investments - mainly in share trading programmes or property - to do this for me.

They say "no trouble." But that's the last I hear from them.

Q. I am 78 years old and have had Parkinson's Disease for 18 years. My husband is 73.

We have a Paihia timeshare freehold, a bach at Omaha Beach freehold, with a rising sale price of between $250,000 and $300,000. Our home is not mortgaged.

We pay thousands of dollars in rates and other bills.

What do we do finance-wise, as I cannot control the outgoings and I'm going down health-wise?

Hoping to hear from you about remaking my life.


A. That's a bit of a tall order. But I have got a couple of suggestions that might be helpful.

I hope you're not too attached to your bach because I think you should sell it. Or, if you use it a lot, perhaps you should sell your house instead. Either way, it seems silly to keep both properties while you're worrying about how to pay the next rates bill.

An option, of course, is to sell the timeshare. One Paihia timeshare resort says its units are selling for between $7000 and $15,000.

But that amount won't make a huge difference to your financial situation, so you might be better to hold on to your timeshare and use it when you want a break out of town - if you do. If not, perhaps you should sell it, too.

Getting back to selling the bach (or house). Let's assume that gives you $250,000. You could put that into a fixed-interest investment, such as Government bonds or bank term deposits. That might give you a regular income of, roughly speaking, $12,000 a year after tax.

Another option is to buy an annuity. This would give you monthly payments until you both die, regardless of how long you live.

The annuity income would be higher than from a fixed-interest investment, because it not only includes interest but uses up your principal. Nothing would be left of the $250,000 in your estate after you both die.

You need to decide whether that matters - and I urge you not to worry too much about it. After all, you would still have your house (or bach) to leave to any heirs. I don't like to see retired people struggling so their family can inherit more.

To give you an idea of the sort of annuity you could get for $250,000, I got a couple of quotes from Tower.

They are for a wife of 78 and a husband of 73, with payments dropping to 75 per cent of the original after the first one of you dies. To allow for inflation, payments will rise by 3 per cent a year.

Tower would give you monthly payments of about $2020, or more than $24,200 a year, in the first year, rising after that. The company would already have paid tax on the money, so you would pay no further tax.

An option would be an annuity with a guarantee period. If both of you died within the period, the payments would continue to your heirs until that time was up.

That way your heirs wouldn't feel ripped off if you paid $250,000 now, then both died soon after.

The same annuity, but with a five-year guarantee, would initially pay you about $1930 a month, or more than $23,100 a year, with no further tax to be paid. It, too, would rise by 3 per cent each year.

I've had some flak in the past for recommending annuities because they don't seem to be a good deal. But that's more true for, say, 65-year-olds.

The older you are, the higher the payments - because the insurance company doesn't expect to be paying out for so many years. Once a person or couple are well into their 70s, annuities pay pretty well.

So there you go. You might be bach-less, but you'd have lower rates, insurance and maintenance bills, plus a couple of thousand more dollars a month to spend. That's at least a start on a remade life.

For more information on fixed interest investments, see a bank, stockbroker or financial adviser. For more on annuities, see an insurance broker.

Q. I'd like to start by saying I agree with an earlier correspondent who suggests ditching the cartoon in favour of more room for questions!

On another topic, I was surprised at the formula given by the American authors specifying how much ought to be saved by what age.

(In the formula, you multiply your age by your pre-tax annual household income. Divide by 10. This, minus any inherited wealth, is what your net worth - assets minus mortgages and other debts - should be.) It amounts to saving 10 per cent of gross income each year for every year of your life.

Ten per cent is a good figure to work with, but surely it ought to be multiplied by the number of years of working life.

Otherwise, it results in completely unrealistic figures. I am 30 years old and have been working only five years.

Perhaps you could suggest a more realistic savings measure.


A. To address the important stuff first, I've had more pro-cartoon comments than anti ones.

And research shows that many more newspaper readers will stop to look at a page with a picture on it. So while there might not be as much column to read, more people will read it. It's a good trade-off.

Now to the net worth formula. You're quite right about it amounting to saving 10 per cent of gross income each year. If you're 50 and making $40,000, your net worth "should" be $200,000. And that is 10 per cent of your income, or $4000, times 50 years.

But, of course, you don't have to save the whole 10 per cent every year. Unless you manage your savings really badly, they will grow over the years at a compounding rate.

Still, the formula is tough on young people. They haven't had a chance to accumulate assets, and often have a big student loan debt.

When you apply the formula to a 20-year-old, it does look silly. They might be on $20,000 a year, so their net worth "should" be $40,000. I bet few 20-year-olds could boast that.

Substituting your idea, of using the number of years of working life, would be more appropriate at that age level.

At older ages, though, the original formula seems to work quite well.

You could start getting fancy, using working life at 20 and then introducing a sliding scale so that you get to whole life by 50.

At 30, you could use your working life plus a third of your non-working life. At 40, it could be your working life plus two-thirds of your non-working life.

In between, you could extrapolate. If, that is, you really want to.

PS: Thanks to the reader who sent me an interesting article about Americans' net worth.

* Mary Holm is a freelance journalist and author of Investing Made Simple. If you have a question for her, post it to Money Matters, Business Herald, PO Box 32, Auckland; or send an e-mail to maryh@journalist.com. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information. Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.