This article was published on 19 May 2012. Some information may be out of date.

The older you are, the better the deal in KiwiSaver

Wake up and smell a more comfortable retirement, middle-agers! A survey released today shows that no-longer-youthful New Zealanders are less likely to be in KiwiSaver and more critical of the scheme. And yet arguably they get the best deal out of it.

About 60 per cent of people over 30 belong to KiwiSaver, compared with 65 per cent of 18 to 29-year-olds, according to a survey by Mercer, one of the six KiwiSaver default providers.

And of people in the scheme, the older ones tend to be less enthusiastic. Only a quarter of KiwiSavers over 45 think the scheme will be “very beneficial” to them, compared with nearly half aged 30 to 44, and 39 per cent aged 18 to 29.

To look at people’s “sentiments” towards KiwiSaver, Mercer divided the 1003 survey participants into four groups: positive and embracing, positive but reserved, skeptical, and actively against. A full 30 per cent were actively against, and another 31 per cent were skeptical. And both those groups were more likely to be 55 or older.

“Disengagement with KiwiSaver may be, at least in part, due to these Kiwis believing it is ‘too late’ for them to benefit from participation in the KiwiSaver scheme, coupled with a preference for other investment vehicles,” says Mercer.

Okay, if people have alternative investments that will deliver them a comfortable retirement, there’s nothing to worry about. But do they?

The survey found that a third of over 45s have made little or no preparation for retirement. And almost two thirds expect to be less comfortable in retirement than they are now.

My suggestion: if you’re not in KiwiSaver, join.

Unless you are 65 or over, it’s not too late to get thousands of extra dollars. And older people get higher effective returns in the scheme.

How come? Let’s look at the money that goes into your KiwiSaver account in 2012. There’s your contribution, the government tax credit and, if it’s your first year, the $1000 kick-start. If you are an employee, there’s also the employer’s contribution.

Even after your first year, the contributions from the others boost your contributions considerably.

Non-employees who deposit $1043 a year will see that boosted 50 per cent by the tax credit. And employees’ contributions are roughly doubled — more for those on low incomes, less for those on high incomes.

This doubling or “one-and-a-halfing” or your own contributions is great. Twice as much going into savings means twice as much coming out in retirement.

But what happens to your 2012 money after this year? It earns the return on the KiwiSaver fund, and continues to do that until you withdraw it years later.

While the new money each year is boosted by the government and your employer, the old money earns an ordinary fund return.

These years of ordinary returns water down the effect of the first-year boost. And the younger you are, the more time there is for watering down.

The people who get the best deal out of KiwiSaver, therefore, are those who join at ages 60 to 64, who have just five years before they can withdraw their money. With only a few years of watering down, the effective returns on their contributions are really hard to beat in any other investment.

People in their 50s also benefit. And even those in their 40s are much better off than young KiwiSavers in this respect.

There’s another argument, of course. Younger people get more years of government and employer contributions, so in that way they are the winners. But they won’t get as high an effective return on their contributions as their parents and grandparents do.

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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.