NZ Herald 5 March 2016

ALet’s get you back on the KiwiSaver ladder, step by step.

• Step One: Realizing you want to make a change.

This is the most important step of all. Well done. And congratulations that you signed on while the $1000 kick-start was still there. It ended in May 2015. Oh, and the start-up date was 1 July 2007.

• Step Two: Understanding how KiwiSaver works.

Employees contribute 3, 4 or 8 per cent of their pay. Employers match the 3 per cent, although their contributions are taxed so they’re somewhat lower. And every year, around July or August, the government pays what’s called a tax credit, which is 50c for every dollar you’ve put in, up to a maximum tax credit of $521.

The average employee’s money is roughly doubled by their employer and the government. And twice as much money going in means twice as much coming out again. That’s a really good deal.

If you’re not an employee — perhaps you’re self-employed, a beneficiary, or at home looking after children — it’s a good idea to set up an automatic payment into KiwiSaver of at least $20 a week or $87 a month. The idea is to put at least $1043 into your account in each July-June year, so you’ll receive the maximum $521 tax credit.

It’s not as good a deal as for employees, but the tax credit still makes it really hard for any other investment to beat KiwiSaver.

Employees can take a contributions holiday after a year, and there are no obligations for non-employees. But it’s best to contribute regularly.

• Step Three: Selecting the most suitable fund for you.

To find out your appropriate risk level, go to the KiwiSaver Fund Finder on www.sorted.org.nz, and click on “Find the right type of fund for you”. The tool then guides you to look at all the KiwSaver funds at your risk level.

I suggest you choose a fund with low fees and good services. Don’t concentrate on returns, as they can change greatly from one period to the next.

You’re interested in ethical investing, so look for funds with one of the following words in the name: “ethical” (or in one case “Ethica”), “socially responsible”, “SRI” (socially responsible investment), or “sustainable”. Also, Amanah has a KiwiSaver fund that invests according to Sharia law.

Click on a fund and you’ll get a brief description of how it invests. For more info, see the provider’s website.

Don’t agonize if you’ve narrowed the choice down to two or three funds. Just choose one and get on with it. Contact the provider — find out how on their website — and ask them to move your current balance over to them. They will take care of that for you.

• Step Four: Deciding whether to put your redundancy pay into KiwiSaver.

Anyone can make extra deposits directly to their provider.

The downside is you tie up the money until retirement, unless you are buying your first home, are seriously ill or in a dire financial situation. And you never know when you might want the money, perhaps to set up a business or help out family.

Still, many people like the fact that KiwiSaver money is inaccessible. It prevents them from raiding their savings.

Even if you decide to save most of the redundancy pay elsewhere, if you don’t get another job you should try to contribute $1043 to KiwiSaver before the June 30 cutoff date, so you’ll get the government’s full $521 for this year.

And if you’re working but your contributions by June 30 won’t total at least $1043, it’s a great idea to top up to that amount.

Unfortunately, though, you can’t catch up on tax credits you’ve missed in past years. But resolve to keep contributing from now on and you can still do well.

• Step Five: Deciding what to do with your daughter’s account.

As stated last week, there are pros and cons to contributing to KiwiSaver for someone under 18.

Briefly, there’s less point than for an adult because children don’t get tax credits. And while the money can be withdrawn for a first home, it can’t be for education, starting a business or other purposes.

On the other hand, if you show the child what is happening to their account, they can learn about market ups and downs and longer-term trends.

If a teenager gets a job, it’s good to encourage them to contribute, to set up what will hopefully become a lifetime saving habit. But there’s one worry. Read on.

AYou raise a good point. In the first couple of years of KiwiSaver, the government paid a $40-a-year fee subsidy, probably partly because of your concern. But that was phased out in 2009. And the more recent loss of the $1000 kick-start increases the worry.

The minimum annual membership fees charged by most KiwiSaver providers are not as high as you think. As shown on www.canstar.co.nz/kiwisaver/, they range from $23 to $50 a year.

Three providers on Canstar’s list — Kiwi Wealth, Smartshares and the Medical Assurance Society — are shown as charging no membership fee, just a percentage fee. But they all charge a minimum of $40 or $50 on accounts with low balances. Canstar is looking at a higher balance.

So your daughters are stuck with paying at least $23 a year plus — in most cases — a percentage of their balance. It is possible, therefore, for fees to wipe out a very low KiwiSaver balance. This is especially so in a higher risk fund when negative returns — which will sometimes happen — reduce the balance.

So, is there a rule to stop KiwiSaver balances going negative? Inland Revenue suggested I ask a provider, so I did.

“There is no rule as such,” the provider said. “However, most investment statements say that you will not be required to make any extra payments over and above what you agree to pay or are obliged to pay (eg the 3 per cent in your first year if you are an employee).” That would rule out having to make a deposit to bring a balance back from negative to zero.

He added, “Also the law says that if you have a zero balance the provider may tell you that it is closing your account.

“I have seen negative balances in some accounts, but only where a provider’s system lets it happen,” he said. Clearly if you’re thinking of helping a daughter sign up to a fund, you should ask the potential provider about this.

But should you be encouraging a sign-up? Probably. Establishing a habit is important, and from age 18 the girls will get tax credits and employer contributions, which will help. Some kind employers even contribute before 18. The girls should ask their employers.

It would be important, though, to choose a KiwiSaver fund with low fees — especially the membership fee. You could use Canstar’s list as a guide, noting the issue with Kiwi Wealth, Smartshares and Medical Assurance mentioned above.

If you explain to your daughters how the fee burden will ease as their balances rise, that might encourage them to save more.

Through KiwiSaver, many young people find themselves with a substantial first home deposit. That might be a good goal for your girls.

Out of interest, has any other reader with a low-balance KiwiSaver account found their balance dwindling? It will of course happen over single bad years, but it would be great to hear from you if it has happened over several years.

AYou’re right that your child can’t access KiwiSaver for education or luxuries. But it’s usually the best way to save for a first home — especially if the saver is eligible for a subsidy of $5000, or $10,000 if they buy a newly built home.

So — after weighing up the pros and cons in the previous Q&As — you might want to open a KiwiSaver account aimed at your son’s first home.

What about education and luxuries? A good way to find a suitable non-KiwiSaver investment is to use the KiwiSaver Fund Finder, as in Step Three above. Then ask the provider if they have a similar non-KiwiSaver fund that you can easily withdraw from. Many do.