A: Government \u2013 and would-be future governments – please note: KiwiSaver now offers some workers no incentives at all. <\/p>\n
And there\u2019s a straightforward fix: get rid of total remuneration in KiwiSaver, under which employer contributions are effectively taken out of employees\u2019 take-home pay.<\/p>\n
For most people in that situation, there\u2019s still the Government\u2019s KiwiSaver contribution for 16 to 65-year-olds. That\u2019s 25 cents for every dollar a person puts in, up to $261 a year if they put in $1042 or more. It\u2019s not much, but it all adds up over the years.<\/p>\n
However, as you note, the Government contribution is no longer given to people who earn more than $180,000. So yes, you might as well suspend your KiwiSaver contributions and save that money in a non-KiwiSaver fund, so you have access to it should you need it. <\/p>\n
KiwiSaver gives you nothing extra \u2013 except the locking up of your savings. That\u2019s important for some people who might otherwise be tempted to spend the money. But clearly that\u2019s not you.<\/p>\n
On the tax situation, the short answer is that the change you plan won\u2019t affect the tax you pay.<\/p>\n
Employer contributions to KiwiSaver and other superannuation schemes are taxed slightly differently from the normal PAYE tax on wages and salaries. <\/p>\n
While the tax rates are the same \u2013 10.5%, 17.5%, 30%, 33% and 39% – the income cutoff points at which a new higher tax rate kicks in are higher for the Employer Superannuation Contribution Tax (ESCT).<\/p>\n
That means for those who happen to have incomes between $15,600 and $18,720, or between $53,500 and $64,200, or $78,100 to $93,720, or $180,000 to $216,000, the ESCT tax on their KiwiSaver contributions will be a bit lower than if they take the money in their take-home pay. It\u2019s just a quirk of the system. <\/p>\n
In your case, though, your 39% ESCT tells us your income is higher than $216,000. So both your KiwiSaver contributions and money you receive in the hand are taxed at the same 39%.<\/p>\n
By the way, you should note that if you suspend payments to KiwiSaver, you will need to renew that suspension every year. It shouldn\u2019t be a big deal though.<\/p>\n
Your situation may not worry many politicians. You\u2019re on a high income, and plan to save for retirement anyway. But others will just spend the money that would have gone into KiwiSaver.<\/p>\n
That would include some lower-income people in total remuneration companies. While they still get the Government contribution, that may not be enough to motivate them, now that it\u2019s just a quarter of the original maximum of $1042 a year. <\/p>\n
For most employees, employer contributions are the big KiwiSaver attraction. <\/p>\n
Total remuneration employers\u2019 removal of that incentive \u201cgoes against the \u2018spirit\u2019 of the scheme,\u201d says the Retirement Commission. It could be \u201can explanation for why some KiwiSaver members (who are in paid work) choose to take a savings suspension\u201d.<\/p>\n
Back in 2019, the Commission\u2019s Review of Retirement Incomes Policy recommended phasing out total remuneration.<\/p>\n
\u201cThe absence of a genuine employer contribution\u201d increases \u201cthe risk that the demands of the day will drown out the demands of the future,\u201d says the report.<\/p>\n
\u201cThere is also unfairness when employees compare their situations with their peers in other workplaces, with one receiving a match from their employer while the other does not.\u201d<\/p>\n
About 25% of employers use total remuneration for all employees, and another 20% for some employees, says the Commission.<\/p>\n
A ban on total remuneration \u2013 perhaps phased over a couple of years to help employers cope \u2013 could be quite a vote winner. <\/p>\n
Worries about selling and renting<\/p>\n
Q: There are several issues that last week\u2019s retired couple, who are considering selling their $750,000 house and then renting using their joint super ($800 weekly), should investigate. <\/p>\n
What happens when one of them dies, or needs to go into care? Would the bereaved partner have to move into cheaper accommodation? Or does $538 (single weekly NZ Super at lowest tax rate) cover a satisfactory long-term rental property suitable for seniors eg disabled access\/easy transport, in their locality? If so, should that be their rental limit from the start?<\/p>\n
Also, can they really afford to invest $200,000 for grandchildren, rather than including them in their wills? <\/p>\n
Shouldn\u2019t they see a financial adviser and work through their options, including a reverse mortgage?<\/p>\n
A: Good questions. But we need to compare selling and renting with the couple\u2019s current situation, with their mortgage-free house and \u201climited savings.\u201d<\/p>\n
The money they now spend on rates, house insurance, maintenance and other homeowner costs might not be much less than the rent they would need to pay. Plus they would have about $700,000 proceeds from selling their house \u2013 with $500,000 for spending and $200,000 for the grandchildren. There would clearly be more money around than now.<\/p>\n
Of course it would be tougher to cover their rent with NZ Super when there\u2019s only one of them. But other expenses, such as food and clothing, will be lower. And they might be happy at that stage to move into a smaller place. <\/p>\n
Still, I agree with you that it would be better to put money for the grandkids in their wills, rather than setting it aside now. Then, if one spouse is struggling after the other dies, or they face big medical or residential care costs, they can use the money for that. <\/p>\n
Some of that $200,000 could also go on treats every now and then. Another reader comments that the couple should \u201cenjoy spending all the money they\u2019ve worked for. Let the kids and grandkids sort their own finances! Travel business class…the kids sure will.\u201d<\/p>\n
On the possibility of using a reverse mortgage, I mentioned that last week. It\u2019s a good alternative, but it wouldn\u2019t free up as much money as selling would. <\/p>\n
Another suggested alternative from a reader: \u201cI\u2019ve recently moved into a retirement village, with fixed fees forever, and would thoroughly recommend that option. No more cares about insurance, electricity, rates and water bills going up all the time.\u201d<\/p>\n
It\u2019s a thought, but comes with its own complications. I would recommend lots of research, starting online, before taking that step.<\/p>\n
More worries<\/p>\n
Q: Last week\u2019s retired couple who are thinking of selling their home and renting said they would have about $500,000 to spend on day-to-day living and travel. So how much would they spend yearly? $50,000? They then get 10 years to live. And remember, power, food, transport, insurance all goes up. Not to mention rent!<\/p>\n
A: Of course we don\u2019t want the couple\u2019s income to run out after 10 years. But you\u2019re overlooking a few of important points:<\/p>\n
The returns they would earn on the money in the meantime.<\/p>\n
The couple wrote of putting their house proceeds in a \u201cmix of investment and on-call\u201d. Let\u2019s assume they would keep money to be spent in 10 or more years in higher-risk investments, money for three to ten years in medium risk, and shorter-term money in cash.<\/p>\n
We would expect the middle and longer-term money to bring in considerable returns over the years. <\/p>\n
Inflation isn\u2019t a big worry. That\u2019s because retired people usually spend less and less as they get older, as reported by the NZ Society of Actuaries. <\/p>\n
It\u2019s true that the purchases you mention will almost certainly become more expensive. But spending on clothing, transport, recreation and culture in particular tend to decrease as we age, according to data from Stats NZ\u2019s Household Expenditure Survey. <\/p>\n
This means that, unless inflation becomes unusually high, most retirees don\u2019t need to worry about inflation. As time goes by, prices rise, but they buy less.<\/p>\n
An exception to this is rent, which will surely increase over the years. But the couple plan to use their NZ Super to cover that and, as I said last week, that rises by more than inflation.<\/p>\n
Do they need $50,000 a year? Given that their rent is taken care of, and they\u2019ll pay no rates or other homeowner expenses, they could probably do fine spending less than that. After all, if they don\u2019t sell their home, they\u2019ll have to manage on their current \u201climited savings\u201d, which would mean considerably less.<\/p>\n
So, if they go ahead and sell the house, how much should they spend, without having their money run out before they do?<\/p>\n
If you retire at 65, a rough rule of thumb is: For every $100,000 of savings you have, you can spend $100 a week and your money will probably last until you die. So with $500,000, you can spend $500 a week, or $26,000 a year.<\/p>\n
But note that this couple are not 65 but in their early 70s. The money doesn\u2019t need to last as long, and that makes quite a difference.<\/p>\n
The NZ Society of Actuaries has published some other rules of thumb to suit people in different situations. Their report is at tinyurl.com\/NZRetire. It\u2019s 14 pages of fairly easy reading.<\/p>\n
One rule that might suit our couple is called the Fixed Date Rule. You set a future date when your money will run out. Then, \u201ceach year take out the current value of your retirement fund divided by the number of years left to that date\u201d.<\/p>\n
Let\u2019s say the couple are 72, and want their money to last until they are 85, which is 13 years. What about after that? By the mid 80s, many people report that spending decreases a lot. And if the couple need to, they can use some of the $200,000 set aside for the grandchildren \u2013 as discussed above. <\/p>\n
So in the first year we divide $500,000 by 13, and come up with around $38,460 \u2013 or $740 a week – to spend. <\/p>\n
In subsequent years, their capital is reduced by what they\u2019ve spent, but boosted by the returns earned. And the next year\u2019s total will be divided by 12 not 13, and the following year by 11 and so on. <\/p>\n
I\u2019ve worked through a couple of feasible scenarios and it seems likely they will continue to have around the same $38,000-odd to spend each year. It\u2019s not big money, but many retired people \u2013 including probably our couple if they don\u2019t sell their home – get by on considerably less.<\/p>\n
Who does build-to-rent?<\/p>\n
Q: Last week in your answer to a pensioner couple you said: \u201cThere are more long leases around now \u2026 these properties \u2018are typically owned by corporate investors and managed by specialist operators\u2019.\u201d<\/p>\n
Do you have the names of some specialist operators, as we are interested to learn more about this. We too are in our 70s and no longer wish to have the responsibility of home ownership. <\/p>\n
A: This type of accommodation is referred to as \u201cbuild-to-rent\u201d. An online search suggests major players include Resido, Simplicity Living and New Ground Living, but I\u2019m not necessarily recommending them, as I don\u2019t know enough about them. There\u2019s plenty of info if you go online.<\/p>\n
\u201cTell me more!\u201d<\/p>\n
Q: Getting 4.6% on a term deposit, Mary! Please immediately send the name of the deposit taker in last week\u2019s question. The missus and I will borrow $200,000 to invest. Your correspondent is either fabricating or the data is stale.<\/p>\n
A: Last week\u2019s reader didn\u2019t name the deposit taker offering that rate. It wasn\u2019t relevant to the Q&A, which was about how safe it is to invest in finance companies that are covered by the new Depositor Compensation Scheme. <\/p>\n
Nor was the interest rate relevant, beyond being attractive. But you\u2019re right. A glance at the list of term deposits on interest.co.nz shows interest rates have fallen since the reader wrote to me. <\/p>\n
That\u2019s hardly surprising, given the Reserve Bank reduced its official cash rate from 3% to 2.5% in the meantime.<\/p>\n
Sorry to disappoint you. However, at the time of writing, you can still get 4.35% on a five-year deposit covered by the DCS \u2013 not too far below 4.6%.<\/p>\n
By the way, I know you were being flippant, but if you were really planning to borrow to invest, I would make one more point. Doing that would gain you nothing unless your borrowing rate is lower than the interest you receive. Good luck with that!<\/p>\n
* 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\u2019s 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<\/a>. Letters should not exceed 200 words. We won\u2019t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice. <\/p>\n