NZ Herald 13 March 2010

AIt hasn’t actually — nothing quite like KiwiSaver, with everybody owning their own account in the same way as we own our own bank accounts.

But I’m not here to defend KiwiSaver — and certainly not the actions of some providers — from all criticism. There’s a lot that’s less than perfect about the scheme. And the reluctance of some providers to let people get money out in some circumstances is one example.

All is not lost, however. I would advise anyone caught in such a situation to move providers — which anyone can do at any time by simply approaching their new provider — and then try again to withdraw their money.

They could even explain their situation in advance to potential providers and ask whether they would permit a withdrawal. If no provider would do so, I would assume the person’s case is not all that strong.

I get the feeling, though, that you would make no such assumption. You seem convinced everyone in the investment business is out to get you, and I doubt if anything I could say would make any difference.

I wonder, though, if I might have a little chat with your son?

Hello, young man. While I don’t want to criticise your Mum, there are other ways to view KiwiSaver. Firstly, while it’s quite likely the NZ Super age will have risen by the time you get to 65, I would be really surprised if it’s above 70.

Even if it’s, say, 75, you are still likely to have many years of retirement ahead of you. I recently read that the number of New Zealanders aged 100 or more is expected to rise from 300 in 1999 to 12,000 in 2051, when you will be 72.

Given that trend, in some ways a rising NZ Super age will be good for KiwiSavers. They will have more years of tax credits from the government and compulsory contributions from employers, all of which stop whenever NZ Super starts.

Your Mum asks if I think you’ll get anything back in retirement. Of course you will. How much depends on how much you save, what sort of fund you invest in and for how long. But, by the time we add tax credits and employer contributions, it’s highly likely you will have several hundred thousand dollars — and a million dollars is not out of the question.

Sure, inflation will erode the value of that money. At 2 per cent inflation, the value of your savings would halve in 35 years, and at 3 per cent the value would fall by almost two thirds. But you would still have a tidy sum.

What about affordability? Assuming you are an employee, all you have to put in is 2 per cent of your pay. At $30,000 that’s less than $12 a week. At $50,000 it’s less than $20 a week. While I know it can be tough making ends meet, I bet you could come up with that if you really wanted to.

There’s another issue here, too. Given that you rent, I’m guessing you have never owned a home. Line up for the KiwiSaver first home help, which comes in two parts:

• After at least three years in KiwiSaver, anyone — regardless of their income — can withdraw their own contributions, employer contributions, plus interest and other returns earned on all the money, to put into their first home. The rest of the money — the $1,000 kick-start and tax credits — remains in KiwiSaver for retirement.
• If eligible, you can also get a subsidy — basically a gift to you — as part of your home deposit. The subsidy starts at $3,000 after three years of contributing to KiwiSaver (or $6,000 if you and your partner are both eligible), rising to $5,000 after five years (or $10,000 for a couple).

To be eligible, your household income must be under a certain level. It’s set at $100,000 a year in 2010, and will probably rise a bit over the years.

Also, you have to buy a cheaper house. The price caps this year are $400,000 in Auckland City, North Shore City, Rodney, Wellington and Queenstown Lakes District and $300,000 in all other areas.

KiwiSaver has got to be the best way to save for a first home. Even if you don’t qualify for the subsidy, the employer contributions and part of the returns on your account are amounts you wouldn’t otherwise have for your home deposit. And you will also have made a start on your retirement saving.

“That’s all very well,” I can hear your mother say, “but his savings aren’t safe.” And she’s right, in that there is no guarantee on the money — something that apparently most people in KiwiSaver don’t realise, according to a recent UMR Research Survey.

The survey found that almost half the people in KiwiSaver think it comes with a government guarantee, and most of the rest aren’t sure. Only 15 per cent know there is no guarantee.

Then again, bank deposits in New Zealand didn’t have a guarantee until recently. The likelihood of big problems with KiwiSaver must be pretty low. And the changes in regulation and enforcement that the government is pushing through should make that likelihood lower still.

If you’re worried, go with a provider you know and trust, and invest in their safest fund, which will probably hold bank term deposits and perhaps government bonds. If those investments go badly wrong, we’ll all have more to worry about than our KiwiSaver accounts.

In the non-KiwiSaver world, term deposits and government bonds can bring in pretty low returns at times. But the KiwiSaver incentives mean that even conservative funds should grow healthily over the years.

Convinced? If you decide to sign up, do let me know. But I suggest you don’t tell Mum — or at least not until you surprise her with a house purchase. Until then, it can be our little secret.

P.S. When I say, “The likelihood of big problems with KiwiSaver must be pretty low.”, I don’t mean that there won’t be poor returns some years — as we have already seen. Especially in riskier funds there will always be ups and downs, which investors need to ride through. I’m talking about dishonest dealings, fraud and the like that lead to investor losses.

AYes, they will keep charging the fee, as they will still be managing your money. The money for the fee will automatically come out of your account. However, the chances are pretty good that your account will earn a higher return than the fee, so it will still grow.

Even if it didn’t grow, it would be extremely surprising if you don’t end up with more than you yourself put in — as opposed to the government and employer contributions.

Regardless of that, it would be great if you can continue to put in something.

Just $5 or $10 a week will still be matched by the tax credit. That means the money going into your account is doubled. And twice as much going in means twice as much earning returns over the years, and twice as much coming out at the other end. What would otherwise have been a $100,000 retirement nest egg will be $200,000.

If you go back into employment, of course, the deal will be even better — with employer contributions further boosting your savings. But it’s still a pity to miss out on the tax credits in the meantime.

AYou’re quite right. Currently the first $14,000 is taxed at 12.5 per cent, and amounts between $14,001 and $48,000 are taxed at 21 per cent. Then it’s 33 per cent on $48,001 to $70,000, and 38 per cent on $70,001 and above.

The woman who wrote the letter in last week’s column earns more than $14,000, so she should really have been paying 21 per cent on the amount above $14,000, which apparently included all her investment income.

However, when the Labour government made tax changes, the withholding tax rate on payments such as bank account interest was kept at the old 19.5 per cent for 18 months. This was to give Inland Revenue and the banks time to apply the new rates.

Why it took so long, don’t ask me. But I didn’t hear anyone complaining about paying lower tax for a while.