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I'm On An Invalid's Benefit. Should I Enrol In KiwiSaver?

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Contributor:
Mary Holm
Mary Holm

Question:

I am 57 years old, live alone and am on an invalid's benefit. I am told that it is very unlikely that I will ever be well enough to work again, but that my medical condition is unlikely to shorten my life span, so I do have to consider how I am to manage financially for the next 25 years.

Living on the benefit is a challenge, at $11,969 net per year. But I feel I should investigate whether I should enrol in KiwiSaver. Am I eligible? Am I entitled for the tax breaks? How much would I have to contribute each week? And could I claim a contributions holiday after a year?

I live in a house owned by a family trust, and I have a right to occupy it. I have no debts, and about $1200 in savings.

Answer:

Mary Holm: Gosh, you certainly don't have a lot to come and go on. Many people earning much more than you say they can't afford KiwiSaver, so good on you for considering it. And, in fact, it should work well for you.

Let's start with your questions. Yes, you can join KiwiSaver, and you'll receive the same incentives as other non-employees - basically the $1000 kick-start and the tax credit, which matches your contributions up to $1043 a year.

As a non-employee, you can contribute as much as you want, including nothing, and you can stop contributing whenever you wish. Only employees have to take contributions holidays.

Should you join? Definitely, at least to get the kick-start. It's free money.

Whether it's good for you to contribute is less clear. It seems a pity not to get the tax credits - which, by the way, are government gifts that have nothing to do with tax.

Still, if I were you I would be reluctant to lower my living standard now in order to have more money later.

There's a great way around this, though, if you have an obliging family member or friend. And they could gain from it too.

It's what I call sponsoring someone into KiwiSaver. Your friend pays $87 a month into your KiwiSaver account until you turn 65 - let's say 7 years from now. That will give you the maximum tax credit.

If you invest in a fairly conservative fund, your return might average 3 per cent a year after fees and taxes. By the time you reach 65, your account would be worth around $18,100.

At that stage, you pay your friend back, with interest. Using the Regular Savings calculator on www.sorted.org.nz, you feed in $87 a month over 7 years, and a generous interest rate of, say, 7 per cent - considerably more than the friend could get in a bank.

The calculator shows you would owe your friend about $10,200. The remaining $7900 is yours.

What's more, if your friend would be happy with 4 per cent interest, you would owe just $9100, leaving $9000 for you.

Where has the extra money come from? Taxpayers - plus returns earned on the taxpayer money. And why shouldn't you get your share?

 

Mary Holm is the author of bestselling books on KiwiSaver and personal finance. She is also a highly praised seminar presenter. Her written advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following that advice.     

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