NZ Herald 21 March 2015

AThe main negative of KiwiSaver for kids — as compared with saving for them elsewhere — is that the money is tied up until they buy a first home or retire. It can’t be used for tertiary education, starting a business or anything else — unless they face bad financial or health problems, and let’s not go there.

But there are three positives:

• While children don’t receive any tax credits until they’re 18, they do get the $1000 kick-start. Grab it while it’s still there!
• People under 18 aren’t auto enrolled in KiwiSaver when they get a new job. But if they are already in the scheme and they take on part-time work as teens, they will contribute to KiwiSaver (unless they take a contributions holiday). This will get them into a savings habit from the word “go”, and they can learn about the ups and downs of financial markets.
• Looking ahead a bit, KiwiSaver is the best way to save for a first home. Your child will be able to withdraw most of the money — including employer contributions and tax credits — to buy a home, and may also be eligible for a subsidy.

Will the $1000 dwindle because of fees?

First, let’s acknowledge that any KiwiSaver account — and particularly those in higher-risk funds — will be hit some years by negative returns in shares or other investments.

This is less obvious in a typical adults’ account, because it’s offset by contributions and tax credits. But in a child’s account there are often little or no contributions.

Then there’s the issue of how fees are structured. Most providers’ KiwiSaver fees include a fixed amount — typically $23 to $40 a year but sometimes $50 or so — as well as a percentage of your balance. And the fixed fee takes a much bigger bite out of a $1000 or $2000 balance than, say, a $50,000 balance.

In a child’s account, therefore, there might be some years in which fees outweigh returns and the balance falls. But it’s really hard to imagine that happening often enough for the balance to go to zero, although I suppose it’s possible.

One way to get around this is to choose a provider that doesn’t charge a fixed fee, but just a percentage fee. A good source of information on this is Canstar’s latest KiwiSaver comparison, at tinyurl.com/canstarkiwisaver.

It shows that providers with no fixed fees include Kiwi Wealth, Smartshares and the Medical Assurance Society. (MAS limits its membership basically to health professionals, lawyers, accountants, architects, engineers, their families and employees.) And while Grosvenor charges a fixed fee on most of its funds, it doesn’t on its default fund.

Of course the absence of a fixed fee isn’t the only basis on which to choose a provider. I suggest you start by using the “Find the right type of fund for you” feature in the KiwiSaver Fund Finder on www.sorted.org.nz. That will establish how much risk you want for your child’s account.

For adults, it’s good to continue to work through the Fund Finder to find the best fund for you. But the Fund Finder doesn’t give a breakdown of fixed and percentage fees. So, for children, let’s move back to Canstar, and check its evaluations of funds with no fixed fee.

If you’ve decided on a defensive — very low risk — fund, Canstar’s highest rating goes to Kiwi Wealth’s cash fund.

If you want conservative, high ratings go to Grosvenor’s default fund and Kiwi Wealth’s default fund. Among balanced funds, it’s Kiwi Wealth’s or Smartshares’ balanced fund. And among growth or aggressive funds, it’s MAS’s aggressive or growth fund or Kiwi Wealth’s growth fund.

Once you’ve narrowed it down to a couple of funds, I suggest you check back on the KiwiSaver Fund Finder for details about each of your finalists. Use the “Check Your Current Fund” feature.

Okay, you’ve chosen and opened KiwiSaver accounts for the kids. How much should you contribute? Arguably, nothing. Because of the limitations on how the money can be used, you might prefer to make your monthly $50 contributions somewhere else. Ask the children’s provider if they offer a similar non-KiwiSaver fund, from which money can be easily withdrawn.

But if you’re happy to aim the money at a first home, saving in KiwiSaver is a good idea. And it does mean your children won’t be able to raid the account for “naughty” spending in their teens!

Either way, keep in mind that tax credits start at 18. So at that point it’s great if parents help with contributions to maximize the tax credit.

One final point: While a fund with no fixed fee will work well for an account with a low balance, some providers make up for that by charging a higher percentage fee. And that’s not good for accounts with large balances, as our next Q&A illustrates.

AI doubt it. At your age — and given you’ve been in KiwiSaver for more than five years — you can of course withdraw all your KiwiSaver savings. But even though you no longer receive tax credits, your employer is generous enough to continue its contributions, and that will considerably boost your total savings.

However, you probably should switch provider — which you can do simply by asking the new provider to move you.

As explained above, Kiwi Wealth is unusual in that it charges no fixed fees. But in some of its funds its percentage fee is pretty high, and the conservative fund is one of them — at 1.04 per cent according to Canstar.

This hits people like you, with high KiwiSaver balances, particularly hard. It also explains why your fees keep rising at a worrying rate.

If you want to stick with a conservative fund — which is probably a good idea given you expect to spend the money fairly soon — you might look at Grosvenor or AMP’s default funds, both with 0.39 per cent fees, or ASB’s conservative fund, with 0.40 per cent, according to Canstar.

While AMP and ASB charge fixed fees as well ($23.40 and $30 respectively), with your balance that doesn’t make much difference.

I suggest you get more info on those funds from the KiwiSaver Fund Finder on www.sorted.org.nz. With any of them, your fees will be more than halved.

AIt’s true that selling an Auckland home these days will give you much more money than a provincial home. But last week’s couple couldn’t afford to move into the Auckland market — or any other big city.

They’re in a small town, and the question is what should they do from here. And, as I said, staying put will probably be a better long-term bet than moving into rental accommodation.

Keep in mind, too, that the government will help out people who need long-term residential care in a rest home or hospital but can’t afford it — as explained in another Q&A last week.

ANot only that, but contesting a will can cause lifelong rifts.

What happened in your family is ideal — the parents split things equally but one heir gives more to another because they either deserve more or need more. Perhaps there’s a lesson there. If you bring up your kids well, they’re likely to do the decent thing.

On your comment about it being up to the father in the original letter to this column, he was the one who wrote in the first place, looking for guidance. So it’s not really helpful to just say it’s up to him.

Of course since then there have been a few conflicting thoughts from different readers, so he may be feeling more confused than enlightened! I suppose in the end each person has to take the advice that resonates for them.