No tricks behind KiwiSaver doubling of money
A reader has “one or two problems” with my last column, in which I said people are silly not to sign up to KiwiSaver.
“Your comments that ‘twice as much comes out at retirement’ and ‘triple the money in, triple the money out’… make one huge assumption — that the provider the investor chooses over time does not lose any money — a highly unlikely scenario surely!”, says the reader.
Let’s take the last bit first. If you choose a low-risk cash and bonds fund, or land up in a default fund, the fund probably won’t lose money.
But what if you choose a riskier share (and perhaps property) fund — a good idea if you’re saving for at least ten years because average returns are likely to be higher?
Such a fund will certainly lose money some years. And it’s really important that you hang in there, confident markets will rise again.
But that’s not the point here.
In my last column I said it’s smart for non-employee KiwiSavers “to contribute $1,040 a year — the maximum that will be matched by the tax credit. Matching means that twice as much goes in, and twice as much comes out in retirement. Brilliant!”
That will always be true. Your KiwiSaver account might drop from $20,000 to $10,000 in a share market crash. But without the tax credits, the account would have started at $10,000 and fallen to $5,000.
And, if you end up with $100,000 in retirement, without the tax credits you would have ended up with $50,000.
It’s similar with tripling. As I said last time, from April 2011 employer contributions are expected to be 4 per cent of pay, matching employee contributions. For employees earning less than $26,000, the tax credit of up to $1040 will also match their contributions.
They will get three times their own money going in, and three times as much out. Other employees earning more than $26,000 will get something between doubling and tripling.
All of this happens regardless of market movements. I didn’t make any assumptions, let alone huge ones!
The reader goes on to lament that “there is no Government backing of the scheme”. But if there were, savvy people would go into the riskiest KiwiSaver schemes, chasing high average returns with no downside.
Inevitably, some of these schemes would do badly, and taxpayers would bail out the investors. That doesn’t sound too popular .
As it is, each person has to weigh up risk versus return. If you are worried about losses, stick with a low-risk fund.
Finally, the reader adds, “My small investment portfolio over the years has done modestly well — better than the super fund where I previously had my money, where all I did was pay the scallywags who ran the fund at my expense! And they’re out there today touting themselves as a Kiwisaver provider. Not for me they won’t be!”
Fair enough. Some past super funds were ripoffs, charging way too much in fees. These days, though, they are leaner and meaner. And under KiwiSaver there will be more scrutiny and several new players — as well as the doubling or tripling of your money.
By all means avoid the scallywags. But if you avoid KiwiSaver altogether, you as a taxpayer are funding a government handout without taking your fair share.
Readers’ questions and media comments show that many people don’t yet understand the basics of KiwiSaver. But when I write about it, I don’t want to bore those who do know.
To solve this, I’ve listed some easy-to-read KiwiSaver rules and incentives, taken from my book coming out on July 13, “KiwiSaver: How to make it work for you”, on www.maryholm.com. Click on the KiwiSaver book page and scroll to the bottom. [This page has been removed from the website. Visit kiwisaver.govt.nz for up-to-date information.]
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.