NZ Herald article 10 May 2010

This article was published on 10 May 2010. Some information may be out of date.

The government’s 2010 Budget included some good news for KiwiSavers. But the question remains: Will that change the minds of those who haven’t yet joined the scheme?

The most obvious Budget change is that the top tax rate on PIEs will drop from 30 to 28 per cent on October 1. And the lower PIE tax rates will also fall, in line with reductions in income tax rates. Almost all KiwiSaver funds are PIEs.

Furthermore, people who say they can’t afford KiwiSaver may cope better with having money taken out of their take-home pay when the October tax cuts increase that pay. True, prices will rise at the same time because of the GST increase. But it still might be psychologically easier if these people don’t see their take-home pay decrease.

More subtly, the increase in GST and decrease in income tax should encourage saving. If you spend the money you pay tax; if you save it you don’t, or at least not now. And deferring tax helps people to build wealth — if they are willing and able to do so.

Almost one third of New Zealanders are now in KiwiSaver. But that’s the easy third. Who are the others, why aren’t they members, and are their reasons valid?

About 570,000 are over 65, and therefore not eligible. But what about the other 2.4 million?

Nobody knows for sure why they haven’t joined a scheme that offers them $1000 upfront plus thousands more dollars from the government and — if they are employed — thousands more from their employer. But letters to my Herald Q&A column and questions and comments at seminars and lectures reveal some common reasons behind their reluctance.

While a few reasons are sound, the vast majority reflect lack of information, misinformation or thinking that isn’t logical when examined.

Surprising though it may seem, there are still some New Zealanders who know next to nothing about KiwiSaver. And misunderstandings are common. Some think the scheme is only for employees. And some think they can’t use the KiwiSaver tax credits because they pay no tax — not realizing the misnamed credits are actually gifts into KiwiSaver accounts.

Others think joining KiwiSaver commits them to contributing for many years. In fact, employed people must contribute for just one year, after which they can take contributions holidays until they retire. And if they strike financial hardship during that first year, they can stop sooner. Everyone else — self-employed or not employed — makes no commitment at all.

There’s another large group — possibly the largest — who simply haven’t got around to it. Some of these will join when they get a new job and are automatically enrolled, but not everyone changes jobs. Some say they just don’t know how to go about it. Others have gathered so much information about different providers they can’t decide which one to go with, so they go with nobody.

Their lethargy is costly. For every month of delay they miss out on up to $87 of tax credit plus employer contributions. That can translate into many thousands of dollars in retirement. See sidebar.

Here are some other frequently voiced reasons for not joining KiwiSaver, and my responses:

• “I don’t like tying up my money until retirement.” This is one of the few valid objections to KiwiSaver — although some people like the tie-up as it stops them from frittering away their savings. Note that you can withdraw at least some of your money if you suffer serious illness or financial hardship, or leave New Zealand permanently. If you die before NZ Super age, the money goes into your estate so your heirs can get access to it. You can also get some money out to buy a first home.
• “I can’t afford it.” Non-employees can contribute zero, and still get the kick-start. Employees must contribute 2 per cent of pay for a year — which isn’t much. On $30,000 it’s less than $12 a week, and on $50,000 it’s less than $20 a week. As explained above, it might be easier to join when your pay goes up at tax-cut time in October.
• “I should repay my debts or mortgage first.” It’s probably best to clear high-interest debt first — although even that is debatable. And number crunching shows that almost everyone with a mortgage is better off in the long term being in KiwiSaver. They should contribute just 2 per cent of pay, or $1,043 a year for non-employees, and put any further savings into their mortgage. The exception is non-employees under 30 with mortgages — a small group — and even they are better off in KiwiSaver once they turn 30.
• “I want a safer investment.” There are KiwiSaver funds that hold only bank term deposits, local government securities and government bonds. Investing doesn’t come much safer than that.
• “My KiwiSaver provider might get out of the scheme.” Three — Asteron, eosaver and IRIS — already have. Your account is transferred to another provider and, if you don’t like that, you can easily move. Just contact your chosen provider, and they will do it for you.
• “I’m already in a good super scheme.” Even if it’s better than KiwiSaver, most people benefit by belonging to both schemes. If you can’t afford it, it’s worthwhile to dip into savings or add to your mortgage so you can contribute to the two schemes.
• “I can do better with other investments.” That’s highly unlikely, given the boost your savings get from the KiwiSaver incentives. Do KiwiSaver only to the extent you get all the incentives, and make further savings elsewhere.
• “Managed fund fees are too high.” The incentives make KiwiSaver a good investment despite sometimes high fees. Anyway, you can choose a low-fee provider by using the KiwiSaver fee calculator on www.sorted.org.nz.
• “Capitalism is grubby and I don’t want to be part of it.” About 24 KiwiSaver providers offer ethical or socially responsible funds, or “ethically” screen all their investments. There’s something for every sensibility.
• “I don’t need to save more.” Great. But join KiwiSaver and divert some of the government’s and your employer’s money to your favourite charity.
• “I don’t trust this or future governments not to change KiwiSaver, or even confiscate government contributions.” If you dislike any rule changes, you can always stop contributing, and be glad you were in while the going was good. Confiscation is hardly likely in such a popular scheme. This is, after all, a democracy.
• “A future government could reduce NZ Super for KiwiSavers.” True, but surely they would also include people with other savings. While all savers could be affected by future means testing, they would still be better off than non-savers. Would you rather get by in retirement on NZ Super only?
• “My employer doesn’t want to contribute and (a) I’m scared to make a fuss, or (b) it’s my friend or family and I don’t want to force them.” We’re talking a mere 2 per cent of pay here. Their reluctance doesn’t say much for how they treat their employees. If you must, negotiate a smaller or zero pay increase in exchange for their co-operation.
• “I’m too young to care about retirement.” Understandable. So join KiwiSaver for the first home help. You’ll be able to put employer contributions and returns on your account into your first home — money you wouldn’t have outside KiwiSaver — as well as your own savings. And you might also qualify for a $3,000 to $5,000 first home subsidy.
• “I’m going overseas soon.” Join before you go. You won’t get the tax credits while living abroad, but your KiwiSaver balance will probably be growing. And if you plan not to return to New Zealand, after a year you can take out all except the tax credits, which go back to the government. (This may change for people moving to Australia.) Alternatively, you can wait until NZ Super age and then take out the whole lot.
• “I’m too close to retirement.” KiwiSaver works particularly well for 60-pluses. You can get more than $6000 from the government, plus employer contributions, and your money is tied up for only five years.

Clearly many New Zealanders misunderstand how to make KiwiSaver work well for them. Much more education is needed. While some New Zealanders will never join unless the scheme becomes compulsory, there are probably many more who would join if they knew more.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.