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Thread: Providing for old age?

  1. #1
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    Default Providing for old age?

    What investment opportunities are there in NZ to make provision for later life?
    Last edited by Rabbit; 7th February 2006 at 12:20 PM.

  2. #2
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    Quite a hard one to answer - but from what ive seen the majority of people seem to be investing in property. And often in property alone! They do this either by having a few rental properties - so getting some income while hoping to gain on teh capital value as well (often the rents dont cover expeences - so watch out for that).

    You also have the option of shares - either managed funds or direct shares. There seem to be plenty of companies that broker for this here.

    Somthing that does seem very popular here is "Secured debenture stocks" which basically means you invest money in a company that then lend it out to people - often like a Fixed Term Bank Deposit - but its not with a bank. These tend to be for specified time periods - and offer a fixed rate of interest on your money - BUT - they are not considered a low risk option.

    Banks do offer Fixed Term Deposits - and many poepl keep at least some of thier money rolling in these from term to term.

    Pensions are available - but often work schemes are not worth it really - theres often no contribution from the company - and there dont tend to be any tax benefits - as the money you pay in has already been taxed

    Lastly - many kiwis do a kind of "tax reduction" thing by running a company at a loss and offsetting thier income tax against it. So for example - you set up an IT company. Both partners work for the company - and both get paid the same amount per month - cutting the tax bill that would be paid if only 1 of them was earnig the full amount (tax on 2x50k is less than tax on 1x100k). You can also offset any expenses in the business aginst tax, so in this instance and it equipment and in fact anything you can imaginable claim as an expense - all come out of you tax bill. I dont understand the ina and outs yet - you need a good accountant - but it IS done and it IS legal.

    Right - thats a start. Is that the kind of thing you need - or am i barking up the wrong tree here? im kind of a bit new to this financial lark - but im learning (on a bl**dy steep curve) - so happy to find out more if you need it.

  3. #3
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    Thanks Avalon, that was really useful.

    I have noticed some people see the move to NZ as an opportunity to gain early access to their pension pots and exploit their equity held in UK property.

    I am not so keen on this as it is a good way to 'get trapped' in not being able to afford to come back to the UK in the future. Also it will be just as important in later life to still have a good pension or other form of provision.

    It is my intention to live within my means whilst in NZ and still make provision for later life, If I could not do that then I would not consider going.

    From what you have said, there seem few tax incentives to save as an individual, and that any reasonable tax breaks are probably only achievable by operating as a company.

    In the UK as of 5th April 2006, it is possible to put up to 100% of earned income tax free into a pension fund, this is a very good opportunity to make some decent provision and perhaps retire early, it is a shame that something similar is not available in NZ.

    High salaried earners seem to get hit harder in NZ than in the UK?

    I notice, that after leaving the UK it is still possible to contribute to a UK pension fund for up to 5 years up to a maximum of 3600 receiving basic rate tax relief at source.
    Last edited by Rabbit; 8th February 2006 at 12:39 AM.

  4. #4
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    Rabbit -

    Its sounds like you would need to weigh thiings very carefully. The first thing I would say to really investigate thouroughly is IF you can live in NZ without taking any UK pension funds out (and also - with this option - the rules are going to change in April anyway - so its not clear wether you would be able to do this after that point at all).

    Look at what other funds you would have available for living costs - and I would really advise that you take a good look at cost of living posts - its not always as cheap as we think. Checking out the supermarket websites such as woolwaorths for example - to see what your average weekly shopping bill would be. (Sorry if all this is teaching you to suck eggs!). Try to get some idea of what your rates would be on any house you buy - and especailly if you have to get a mortgage - check out the online calculators (westpac have the best) and see what its going to cost you.

    Many people certainly do leave thier pensions in the UK. Im not - simply because my pensions are so small its not worth it for me - and its a much better use of the money to pay a chunk of my mortgage. With rates at around 9%, "Investing" the money in the mortgage nets me the equivalent of about 12% credit interest, adn makes my house cheaper to buy outright in the long run. Im also concerned about whether the UK government is going to do another pension grab at some point. That more than anything has made me look at "alternatives" to pensions as a means of saving for later on.

    In that vein - you really shouldnt have too many problems here - there certainly are options.

    Im also not entirely sure that high earners are taxed more heavily than in the UK. Now i do have to say that tax is an issue I always struggle to understand, but bear in mind that although the earning bracket is actually quite low for higher tax rates @ $60k, the top rate of tax is only 39% - and the only addition onto that is your 1-1.5% acc levy - NOT 11% NI. It feels to me as though actually the lowest earners are hardest hit, as there is no tax free allowance. This more than anything I think makes saving hard. The banks for example offer good rates on saving accounts (ASB is currently offering 7.4% - and thats on a normal bog-standand account), but you do get taxed on all the interest earned - even with no other source of income.

    As ever - so mauch is dependant on your personal situation, and your likes and dislikes. I loathe pensions for example, so they just dont suit me as a way of saving for retirement - others love them.

    HTH

  5. #5
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    Thanks Avalon,

    you seem fairly clued up, and I agree there is no NI element.

    Our joint earnings in NZ will be a reasonable amount in NZ dolars per annum (salaried), I know allot more than most, but at the same time after the Equitable Life scandal (I lost a few pennnies) in the UK I need to make big provision given my age.

    Another 10 years of work I will really enjoy but at the same time I want to have freedom in later life.

    I am concerned that within NZ the property market is the key outlet for investment savings - and that bubble may be about to burst? E.g. especially when you consider prices, the land mass and size of population.

    Current prices are probably the equivalent to France?

    I did notice whilst I was out there they did receive most of the UK property e.g. "buy-to-let" programs - probably fueling the market.

    I am a little concerned about a potential future abolition within NZ of the "grey-list".

    IF NZ offered their people a better outlet in terms of saving - other than the property market, then this might help get property prices under control as part of a soft landing for the economy.
    Last edited by Rabbit; 8th February 2006 at 09:34 PM.

  6. #6
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    UK Personal Pensions:

    The problem is that with the upside (significant tax relief) comes a huge downside (the regulations governing what you can do with your pot when you decide to retire).

    Over the recent past at least two things have served to make predicting your future pension if you're in a money purchase type of scheme a very risky business indeed:

    a) The stockmarket going backwards - people with a long run until retirement at least get the bonus that they're buying units at a reduced rate which will hopefully appreciate in the longer term, but those nearing retirement age may have seen their pots shrink by a significant amount and not be able to wait for things to bounce back.

    b) Annuity rates - Currently you have to use at least 2/3 of your pot to purchase an annuity, and the dual action of people living longer and low inflation which affects gilt rates has meant that annuity rates have fallen through the floor.

    The combined action of these two forces has meant that some people have acheived lower per month annuity payments when they eventually retired than had they taken their pensions years earlier - depite contributing for more years and putting themselves in a position where they will be paid the annuity for a shorter time.

    The powers that be in the civil service (who have public sector index linked pensions to look forward to which are based on a percentage of their final salary) are unwilling to change the rules away from forcing people to buy an annuity when they retire because they fear that we'll blow it all on a round the world cruise and then throw ourselves on the mercy of HMG.

    Property Investment:

    The value of houses in NZ has been steaming ahead for a number of years and we all know that it can't last. There has to be some correction in the (near) future. But that still doesn't make investing in property a bad choice for those with a long term view. In fact it holds with it the possibility of very good returns.

    The trouble is that many people seem to think that they can get into it and make a killing at no cost. Whilst that is possible for some lucky people who buy the right property at the right time, it's in making a pretty reasonable return over a longer term at some cost that holds the more realistic option for most of us.

    Consider a situation where you buy a $250,000 house in the current climate with 100% mortgage, and rent it out for $250 per week. At the end of the year you're going to be $7,000 or so down on the deal as the rent fails to cover the mortgage repayments by this amount.

    Many would say that you have lost money on this investment. But if the asset has appreciated only by a small percentage you will have shown a return on that investment of $7,000. At an increase of 2.8% or so you break even - the asset is worth $7,000 more than you paid for it if you were to sell it, and you've parted with $7,000 to get to that position.

    If house prices increase by 3.5% your asset is worth $258,750 and you have made $1,750 on your investment of $7,000 - a return on the year of 25%. Try beating that with a fixed rate deal, or with asset growth if you had put the $7,000 into a pension fund even if you did get some tax relief on your contribution.

    Of course the house may decrease in value over the year in which case you have made a real loss, but you have only run the same risk as share prices dropping in your pension fund and finding that the notional value of your pot is lower at year end that at the start even though you had put some money into it. Certainly many of us will have been in that situation at one time or another. We just shrug our shoulders and expect that over time (and before we want to retire) another bull market or two will have redressed the balance and we will have achieved the magic 8% pa average growth that everyone talks about.

    In fact if you invest in property in NZ at the moment you're cushioned to a limited extent during the years that the market moves against you. If you purchase through an LAQC you can offset the $7,000 loss against tax and at least get back $2,730 of it. And you can also depreciate the building at 4%pa to magnify the loss and increase the tax rebate - you only pay back the amount of the tax rebate given as a result of the depreciation if you eventually manage to sell the property at an amount higher that the property's current book value. In effect an interest free loan from the government to help you to afford your property investment!

    And at the end of the day when you sell your asset (provided that you don't get rid of it so quickly that the IRD considers that you only bought it for capital gains) you don't get taxed on those capital gains you make.

    There was too much talking up of property investment up until about 18 months ago when people were being encouraged to 'get rich quick'. There is now, to my mind, too much talking down of property investment, particularly if you are looking to 'get comfortable slowly'.

    I hope all this makes sense - it is getting late and I have a date with "The Time Traveller's Wife".

  7. #7
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    George,

    What does LAQC mean?

  8. #8
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    http://www.approved.co.nz/resources/laqc.php

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