Long tie-up in KiwiSaver no big deal
A Canterbury reader is concerned about whether to recommend KiwiSaver to his daughters. “For someone in their early twenties, the monies invested in KiwiSaver — even if a contribution holiday is taken — will be tied up for some 40 odd years,” he writes.
“A contributor this young could well get married, move overseas or even die in the intervening years, so would it be wise for someone this young to join?”
Yes it would.
The tie-up of your money is the big negative of KiwiSaver. While some people wouldn’t otherwise have the discipline to save, most of us don’t like to limit our options.
Don’t forget, though, that you can withdraw your and any employer contributions to buy a first home — and you may also receive a government subsidy — a great bonus for the young. And you can get most or all of your KiwiSaver money out if you move overseas permanently, strike financial hardship or serious illness, or die.
Even if none of that applies, many people don’t realise how little commitment there is to KiwiSaver. You can gain plenty whilst tying up little of your own money.
As our reader points out, nobody has to keep contributing to KiwiSaver. Non-employees — including the self-employed and beneficiaries — can stop whenever they like. With some providers, they can even make zero contributions ever.
Generally, employees have to contribute for a year before taking a contributions holiday. But in times of financial hardship they can stop early. And with the minimum contribution now 2 per cent of pay, someone on $50,000 can put in less than $20 a week, and at $30,000 it’s less than $12 a week. It’s small bikkies.
Everyone in KiwiSaver receives the $1,000 kick-start plus the government’s annual tax credits, which double your contributions up to $1,043 a year. If you are an employee contributing 2 per cent, your employer will also match that. That means many employees’ contributions are tripled.
If you stop putting money in, the tax credits and employer contributions will also stop. But your account will still hold anything from $1,000 for a non-employee who puts in nothing, to several thousand dollars for an employee. Over the years, fees will be deducted, but interest and other returns will usually more than offset that, so your account will grow.
Even if it shrinks, it’s hard to imagine a non-employee’s $1,000 dropping to zero. It’s even harder to imagine an employee’s balance falling below the amount they put in, given that they would have to lose all government and employer contributions first.
While doing KiwiSaver minimally ties up the least money, you’ll get most out of it if you keep contributing. Non-employees should put in $1,043 a year, and employees should put in 2 per cent of pay — topped up if necessary to reach $1,043.
Double or triple the amount going in — thanks to the tax credits and employer money — means double or triple out the other end. A much more comfortable retirement is surely worth the loss of accessibility in the meantime.
Our reader has one other worry: “the possibility of the chosen KiwiSaver company going broke in such a long period.”
That could happen. But with KiwiSaver you are not investing in the provider’s business. Trustees make sure your money is invested as stipulated — in many different assets, such as bonds, shares and properties. There’s no way they will all go belly up.
If your provider gets into trouble, you account will be transferred to another provider, or you can easily move elsewhere yourself.
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.