KiwiSaver advice with coin

KiwiSaver

KiwiSaver is a national and voluntary retirement investment scheme for New Zealanders

What is KiwiSaver?

KiwiSaver is a voluntary savings initiative to help you with your long-term saving for retirement or to assist you purchasing a first home. KiwiSaver Schemes are managed by private sector companies called KiwiSaver providers. You can choose which KiwiSaver provider you invest your money with, and while you can switch between providers you can only be a member of one scheme at a time.

Who can join?

You don't have to be employed to join KiwiSaver, but you do have to be:

  • A New Zealand citizen, or entitled to live in New Zealand indefinitely
  • Living or normally living in New Zealand
  • Under the age of eligibility for New Zealand Superannuation

Find out more about who can and can’t join KiwiSaver on the Inland Revenue KiwiSaver website.

How you make contributions

While KiwiSaver is voluntary, if you’re 18 or over and start a new job you’ll be automatically enrolled in KiwiSaver (with some exceptions).

For most people, KiwiSaver is work-based. This means you'll receive information about KiwiSaver from your employer, and your KiwiSaver contributions will come straight out of your pay.

  • If you choose to join, contributions are deducted from your pay at the rate of either 3%, 4% or 8% (you choose the rate) and invested for you in a KiwiSaver Scheme.
  • If you’re automatically enrolled you can ‘opt out’ (leave KiwiSaver), but only between two and eight weeks of starting the job. Once you join you must contribute for at least 12 months. After being a KiwiSaver member for 12 months you can take a break from saving (called a ‘contributions holiday’) or carry on.

If you're self-employed or not working, you can contribute directly to your KiwiSaver investment provider. These are called voluntary contributions, and anyone who is self-employed or not working is usually well-served by contributing at least $1,043 each year to obtain the annual member tax credit, described below.

Why join KiwiSaver? What are the advantages?

KiwiSaver is a hassle-free way to regularly invest, and several great benefits make KiwiSaver a ‘must-have’ component of any wealth creation plan. The key benefits are:

  • Annual government-funded member tax credits up to a maximum of $521 per year, subject to member contributions
  • Regular contributions from your employer
  • You can withdraw your funds to put toward the purchase of a first home, subject to conditions
  • If you’re employed, your contributions come out of your pay before you see them, making investing easy
  • If you change jobs or leave work, your KiwiSaver investment stays with you
  • Many people are also eligible for additional funding toward the deposit on their first home.

Choosing your provider

How well your KiwiSaver investment performs will depend on the skill of the manager running your fund (including how the fund is structured if the fund is one of the few passively invested KiwiSaver Schemes), the performance of the underlying investments held by your fund, and the fees charged on your fund. Most New Zealanders give little thought to which KiwiSaver Scheme they’re in, often staying in a default scheme or simply sticking with their bank scheme so they can see their scheme when they log in to online banking. Most often, we advise people to not check their KiwiSaver balance regularly, such as when they log in to online banking, and instead keep in mind that KiwiSaver is a long-term investment which will occasionally go down in value - unlike a bank savings account it may be displayed next to.

Crucially, not making an active choice about which KiwiSaver Scheme you use could cost you hundreds of thousands of dollars before you reach retirement in higher fees, underperformance, or both. While there are no guarantees about future performance, choosing your own provider ensures you can make the most of KiwiSaver by investing in a scheme which:

  • Is well-managed
  • Has low fees
  • Is well-invested
  • Has investment options suitable for your needs
  • Invests ethically and responsibly
  • Has a track record of strong performance, noting that past performance doesn't guarantee future returns

As we’re not a fund manager and aren’t owned by a KiwiSaver provider (unlike some financial advice firms!) we work with a variety of KiwiSaver providers and can compare the performance of nearly all of them. This means that we can check your existing investment without bias and, depending on your personal circumstances, can find an alternative that suits you.

If you’re a member of the NZDF, it’s tough to beat the New Zealand Defence Force KiwiSaver Scheme, which has a range of benefits, most importantly the additional CDF payments exclusively for those serving in the NZDF. You can join this scheme online.

Disadvantages of KiwiSaver

Are there disadvantages of KiwiSaver?

While KiwiSaver has some great benefits, making a minimum contribution a 'no brainer', the disadvantages below mean that most people shouldn’t invest more than the minimum into KiwiSaver. Instead, as a complement to KiwiSaver, it’s nearly always a great idea to have other investments which can be more easily accessed. This is where an Authorised Financial Adviser can advise you on the best investment options for your situation, so you can achieve your financial goals while staying flexible.

Inflexibility

Strict withdrawal criteria mean that your KiwiSaver investment will generally be inaccessible until:

  • You're eligible for New Zealand Superannuation, or
  • you buy your first home, or
  • a limited range of other criteria are met. Call or email us for more details.

This means KiwiSaver doesn’t consider varying situations you may be in, and whether this is the best form of investing for your individual needs. For example, if your focus is to save for your children’s education, then KiwiSaver is clearly the wrong model. There are plenty of other investment funds to choose from that achieve the same compounding investment return without being locked away.

You can only be a member of one KiwiSaver Scheme at any time

When an investment passes a certain threshold of value, we typically recommend investing with a range of different investment managers. This is to avoid ‘concentration risk’, or the risk of one investment manager underperforming over a period of time. While concentration risk isn’t a problem for most KiwiSaver members yet, as most balances are reasonably modest, an investment approach which spreads risk between different investment managers is currently only possible with select KiwiSaver Schemes.

Misconceptions about KiwiSaver

There are still many misconceptions about KiwiSaver. One of these is that any investment made into KiwiSaver is guaranteed by the government. While the government regulates KiwiSaver providers and helps administer KiwiSaver, the government does not guarantee returns for KiwiSaver investments. This means any investment you make in KiwiSaver is made at your own risk. Arguably, this is actually a significant advantage, as it means that not only should you take an interest in your KiwiSaver Scheme (as you should with all investments), but it also stops KiwiSaver providers from taking undue risks - which many surely would if the government was there to reimburse any losses when they made a mistake!

Government changes

Investments in KiwiSaver are subject to the KiwiSaver Act of 2006. As is the case with most pieces of legislation, this act has been changed with successive governments. In general terms, the more years there are to pass before you retire, the higher the likelihood that there will be more changes to KiwiSaver by different governments.

Specifically, to date, a number of the financial incentives originally designed to encourage people to use KiwiSaver have since been modified or removed. The eligibility age for New Zealand Superannuation has also been increased, which increases the age people must reach to access their KiwiSaver investment.

KiwiSaver complacency

Your entry age, who you choose to place your KiwiSaver investment with, your contribution rate, and the type of fund you choose can all have massive effects over the long-term. As an example, the table below shows the potential balances at retirement for someone who starts contributing at 20, versus someone who starts contributing at 30, assuming both earn a salary of $45,000 per year, contribute 3%, and start with a $0 balance. It also shows the difference between three typical fund choices.

Fund type Entry at age 20 Entry at age 30
Conservative $430,000 $254,000
Balanced $761,000 $391,000
Growth $1,356,000 $601,000

The table above demonstrates the importance of not only enrolling and contributing to KiwiSaver as early as possible, but also how your decisions around the fund type can result in hundreds of thousands of dollars difference at retirement age.

KiwiSaver is not enough

While KiwiSaver undoubtedly offers you an effective method of investing for the long-term, perhaps the biggest issue with KiwiSaver is that many New Zealanders think that because they’re a KiwiSaver member they’ll have a sufficient nest egg for retirement. For most people, this couldn’t be further from the truth, as KiwiSaver is just one part of an overall wealth creation strategy.

KiwiSaver for first home buyers

If you’ve been a member of KiwiSaver for three years, you may be eligible to withdraw some of your KiwiSaver investment to put toward purchasing your first home. Learn more about buying your first home, including what may be available to you through KiwiSaver and the KiwiSaver Home Start Grant.

What now?

For a free and no obligation consultation with an Authorised Financial Adviser about topics such as how your current KiwiSaver Scheme investment compares, buying your first home, investing in more flexible investments than KiwiSaver, and/or how you can best prepare for retirement, call 0508 MILESTONE (0508 645 378) or leave your details and enquiry below.