Rob Stock

Those on lower incomes will miss out on many KiwiSaver benefits, reports Rob Stock.

The poor may have to take some circumspect routes to participate in KiwiSaver.

KiwiSaver, a government-devised universal workplace savings scheme starting on July 1, was devised with contribution rates at 4% and 8% of gross salary - effectively just over 5% and 10% of take-home pay.

That's a chunk many lower-income New Zealanders would struggle without.

As a result, many lower income families will have little choice but to opt out of KiwiSaver, and miss out on the $1000 new account subsidy, annual fee subsidies and possibly tax breaks on contributions - all things middle income and rich savers will get, and need far less.

It could turn out to be worse. Should the next round of company pay rises be offered as KiwiSaver contributions by employers (some say this is likely as employers could offer 5% pay rises costing them 2.5%), the poor who want the money in their pocket could easily end up getting 2.5% less than others as they cannot afford to save into KiwiSaver.

Elliott Burcher, who is helping set up a KiwiSaver scheme for credit unions, said there was a strong argument for a 2% savings rate to encourage those on lower socio-economic rungs to participate, though the unions' plea for it was brushed aside by Wellington.

The credit unions' 176,000 members include many on low incomes, so their scheme was designed with partner Mercer with the intention of making it easier for them to participate.

The Credit Union Association hopes the scheme will have a minimum contribution of $5 a week, so even beneficiaries could participate. It will also make it attractive for grandparents to open up accounts for grandchildren.

Strategies for poorer families to get benefits from KiwiSaver could include:

Get a second job and open a KiwiSaver account attached to it: One of the minor, but potentially useful loopholes in KiwiSaver is that in some circumstances, a person with two incomes only need save into KiwiSaver from one. That is, someone who does not believe they can afford to save could get a second, part-time job - say delivering marketing fliers or local newspapers a couple of evenings a week, or buffing car-lot cars on a Saturday - and open a KiwiSaver account making contributions from the money they earn from that. There's no requirement they also make contributions from their main salary. Should the family move onto a firmer financial footing in the future, they could change that and save more. That second job could put the family in so much better a position that the most profitable thing to do could be to start saving from their main salary, getting them whatever employer contributions come from that.

Split the contributions with the boss: If an employer is willing, a worker can contribute 2% of the 4% minimum. It will cost employers about 67c for each dollar they put in because of tax breaks. The chances are, some bosses will accept this only if their contribution is part of the next pay rise they offer people, but it is a way which could limit the impact on take-home pay.

Non-working partners: Getting round the 4% problem is a biggie, but for families with one non-working parent who cannot afford to save much, there is a route. Instead of opening an account for the worker, open one for the non- worker. 4% of nothing is nothing, so contributions can be as low as the scheme provider allows. Of course, should they get a job, they would have to start saving 4% or 8% of their salary automatically, though after 12 months, they could take contributions holidays.

Skip a generation: Some parents may decide there is not much they can do for themselves, but that they can help their kids climb the wealth ladder. Credit unions say grandparents are likely to be interested for this reason. The first of their weekly $5 contributions for grandkids would effectively be a $1005 contribution, and all it would cost them would be 52 contributions of $5 - just $260. Children would be able to get subsidies of up to $5000 when they buy their first home, which could one day help bridge the affordability gap. It could mean kids instantly have savings worth more than their parents have ever managed, though parents/guardians must open the account, and the child must save at least 4% of their salary into it when they start working, though they could take a perpetual contributions holiday.

Beneficiaries: It is expensive being poor. Power is more expensive (no early repayment discounts), credit is expensive (rates of 30% or so can apply), and soon saving will be more expensive thanks to the KiwiSaver tax breaks wealthy and middle-income earners will be getting. But at $5 a week, saving into a KiwiSaver account will be possible for beneficiaries who are careful with their pennies, says Elliott. Once again, when they find work, they will be obligated to save, though anyone who has learnt to live on less could find it much easier to save from a salary.

SORT ME: A FINANCIAL WARRANT OF FITNESS

Hundreds of thousands of New Zealand families may need a financial overhaul to take advantage of KiwiSaver, and the Retirement Commission has launched an online financial healthcheck to help them do it.

Sort Me launches this weekend on the commission's website at www.sorted.org.nz six weeks before the launch of KiwiSaver, and that timing is more than a happy coincidence, says Retirement Commissioner Diana Crossan.

"We would have done it anyway," says Crossan of the Sort Me launch, "but the timing now is perfect.

"Before the launch of KiwiSaver, which may or may not be suitable for individuals, people need to look at their needs and current situation." The truth is, she says, "A lot of people don't know what their current financial situation is, and before they can decide if Kiwisaver is for them, they need to find out."

Sort Me asks users to answer questions on eight areas of their finances: goals and dreams, income and making ends meet, debt, saving and investing, protecting their assets, keeping their affairs in order, preparedness for big life changes and retirement.

In each area the users' answers are graded either "sorted", "sort of" or "sort it out" and suggestions are made on sensible action to take. There are also links to budgeting tools, further information and calculators.

Joan Baker, co-creator of Sort Me, says the majority of New Zealanders could afford to save into KiwiSaver, if they had more control over their finances.

The self-employed are being unfairly shut out of the main tax breaks for KiwiSaver, says accounting firm Staples Rodway, and it's demanding that be changed.

Just as the self-employed were carved out of the Working for Families tax credit package designed to hand tax back to those with families and low to middle incomes, so the main tax break on KiwiSaver is being denied to them, says Matt Baker, an associate director at Staples Rodway.

Employees on PAYE can receive contributions into their KiwiSaver accounts, which can be opened from July 1, directly from their employer. A tax break rushed in as a late amendment to the KiwiSaver Act means firms pay just 67c to make a contribution of $1.

The self-employed can open KiwiSaver accounts, but their problem is that there is no employment relationship. In effect, though they are their own employers, their contributions do not qualify as "employer contributions" under tax laws, so the tax exemption is not available.

Baker says that is an arbitrary and unfair distinction, and the government should level the playing field, as there are about 200,000 self-employed people who are no less worthy of tax-breaks.

For many, there is a tax loophole, says Baker. Those who set up a firm and pay themselves a wage have a means of getting the tax breaks, though Baker says it's never a good thing for tax legislation to create reasons for people to restructure their business affairs.

The loophole is a comfort for some, but others, such as real estate agents, are required by the rules of their job to work under their own name.

Michael Cullen's office said it was aware of the issue, but had no plans to amend the KiwiSaver Act to allow the self-employed to claim the tax break.

Rob Stock compares the finance deals on offer at the "big stores" and gives credit where credit's due. GOOD CREDIT records mean little when buying on hire purchase in shops.

Consumer lenders often claim to be unable to publish finance rates because they judge each and every case on its own merits, but a visit to electronics, mobile phone and furniture stores in Auckland found only two shops where finance rates were not the same for all customers.

In one shop, the salesman said a lower rate could only be offered if he pushed the finance company to offer better terms.

There was also a wide range of finance costs, and in the nine big- brand stores visited we found finance rates ranged from 0% at Telecom and The Warehouse (and Harvey Norman for the first 18 months), to 23.9% at Bond & Bond.

On top of that, premiums for repayment insurance (which repays the loan in the case of death, illness or redundancy) and extended warranties could increase the real price charged for the goods by between 30% and 60%.

And there was no room to haggle, we were told in all stores, because there was no room to negotiate on price when buying on finance.

And in one store, a Vodafone stand in the Westfield shopping mall in St Lukes, we were told we had to pay for payment protection insurance even though the law states it can only be sold as optional.

The stores we visited source their finance from some of the big boys of the consumer finance industry: GE Money, Finance Now, and Fisher & Paykel Finance (which operates the Farmers and Q-card systems). The Warehouse gets its finance from Gilrose Finance.

Here is our rundown of the nine stores we visited:

Dick Smith, St Lukes: We expressed interest in an Acer 32-inch widescreen TV with 24-month no- deposit finance provided by Finance Now (catch-phrase: "Want it NOW? Get it NOW!") priced at $1798. The interest rate quoted was a flat 19.75% with no reduction for a good credit history, and a booking fee of $50. Loan repayment insurance, which would have cost $134.85, was sold as optional, though not pushed by helpful, knowledgeable staff. We were also offered an extra two years on our 12-month warranty, at a single premium of $392.99. Total repayments without warranty or insurance would have added up to $2241. Add in insurance and warranty and we would have paid $2884 in total, 60% on top of purchase price.

Hill & Stewart, St Lukes: Slickest of the salesmen, and the only one who knew the finance terms off by heart. We looked at a Sony 32-inch LCD TV priced at $2294.95, with finance offered at 14.75% from Consumer Finance Ltd's Q-Card (catch-phrase: "The Lifestyle Card"). The card is like hire purchase on a card, but like a credit card, consumers get a credit limit, so once they have paid off an item, they simply swipe the card again. Unlike a credit card, the finance rate for hire purchase depends on the stores you buy at. We were told there would be a $63 booking fee, and each time we used the card afterwards, there would be a new booking fee of $43. To increase the warranty to five years would cost a further $350. On the 36-month contract, we'd have paid $3365 in total, including the warranty, increasing the purchase price by 46%.

Bond & Bond, St Lukes: Worst sales assistant. When asked to answer questions on the TVs on display, he chewed noisily on gum and started to read the tags on each of the TVs, so we asked to speak to someone who knew their trade. GE Finance provide the finance (catch- phrases include: "Make it possible"), and the salesman said if he pushed our case on a $1999.99 Philips 26-inch widescreen TV, it might move on the interest rate. Just as well, because the 23.9% we were quoted was steep. We were told that as low as 14.9% might be possible, but was unusual. The small print on the application form set out the additional fees, such as $15 for repaying early, $25 late payment fees and 5% additional interest (28.9%) charged on money owed in arrears. There was an establishment fee of $50 and loan repayment insurance would add another $66. Another $249.99 would extend the warranty from 12 months to three years, and $399 would extend it to five years. Taking all the extras would have resulted in paying $3060 over 24 months, increasing the purchase price by 53%.

Bedpost, St Lukes: Helpful, low-key salesman and finance from Q Card again. On a $2880 Rimu king-size bed, the finance rate would have been 18.9% for periods of between 12 and 36 months. There was an establishment fee of $60. Once repayment insurance was added at a cost of $180, we would have paid $3771 in total, increasing the price by 31%.

Vodafone, St Lukes: For a $999 Palm Treo 750v smartphone we were told repayment insurance was compulsory. We were also accidentally shown the password for getting into the Finance Now secure website, which was written on a piece of paper taped to the inside of a cabinet. There was a $50 booking fee, and initially we were given the staggering finance rate of 27.9%. That turned out to be a mistake, and the rate we were finally offered was 23%. The insurance added $75 to the bill, though the Finance Now website clearly had it as an optional item. There was no extended warranty available. The monthly repayments would have been $138.58, though they would have been much higher for customers who did not take out a 24-month calling plan. We would have also needed a data plan to send emails. In all we would have paid $1663 for the Palm Treo (excluding calling and data plans), an increase on the shelf price of around 60%.

Telecom, St Lukes: The Palm Treo would have cost us $999 at Telecom, too, and again the finance terms depended on taking out a monthly plan. The finance rate for the loan would have been 0% over 12 months, with no booking fee. Mobile phone insurance would have cost $9 a month ($85 excess), and we could have extended our 12-month warranty to 24 months at a cost of $79.95. Without the warranty and calling plans, we would have paid shelf price.

Harvey Norman, Albany: Shopping for a $719 Xbox360, we were offered 18 months' interest-free credit, with payment deferred, meaning we would not have to pay anything until the second half of 2008. Anything not paid off after that would have attracted interest at 24.2%.

Danske Mobler, Albany: Buying a rimu dining set of table and six chairs for $4290 would have got us six months' interest free and deferred payment, followed by 19.95% interest on the balance until paid off. Finance offered by GE Money.

The Warehouse, New Lynn: Finance provided by Gilrose Finance. The only store that would not quote a finance rate until they ran a credit check. The result was a 0% rate for 12 months' finance on a Transonic 32-inch TV, when the sales woman had guessed I'd be paying about 22%, close to the 23% interest used by the calculator on the Gilrose Finance website. The booking fee would have been $35 and there was no mention of insurance.

CARD GAME HIRE PURCHASE sometimes comes disguised as store cards, on which the interest sometimes even beats the 19.95% charged on standard credit cards.

The highest interest on storebranded cards are those backed by GE Money's Credit Line. They charge nearly 24%, according to figures from www. interest.co.nz.

Farmers Card, backed by Fisher & Paykel Finance, isn't far behind, though it does not charge a $25 annual fee and there is an attractive package of additional benefits like exclusive shopping days and offers for diehard Famers enthusiasts.

The Red Card from The Warehouse shows not everything in the Red Sheds is a bargain, with interest of 22.45%. The bestrated card is issued by Smith & Caughey, which charges 15% and has no annual account fee.

Unlike the Q Card, all purchasers with store cards pay the same interest rates, regardless of their credit histories.