This article was published on 6 November 2010. Some information may be out of date.

Non-KiwiSavers’ reasons don’t stand up to scrutiny

Many New Zealanders who haven’t joined KiwiSavers are missing out on their fair share of the government booty because they misunderstand how it all works. Meanwhile, others in the scheme are not getting as much as they could out of it.

These two conclusions come from reading a new Inland Revenue report on KiwiSaver. In this column we’ll look at why many reasons for not joining are not valid. Next time — in two weeks — we’ll look at how KiwiSaver members could do better.

The main reasons eligible people have not joined KiwiSaver are as follows — with my comments added:

Almost one third said they couldn’t afford to.

Two per cent of pay — the minimum employees must contribute — is less than $12 a week if you earn $30,000 and less than $20 a week if you earn $50,000. And after a year, employees can take a contributions holiday and then contribute nothing, or less than 2 per cent.

Non-employees don’t ever have to contribute anything — although it’s best for everyone to put in up to $1043 a year, to maximise the tax credit.

There are people who really don’t have any spare money. But not all that many. Consider what would happen if you lost your job and found another that paid 2 per cent less. You wouldn’t starve. As a union official recently said to me, “When members say they can’t afford KiwiSaver, I tell them to cut out a couple of beers a week.”

About 30 per cent said there were “either better ways to provide for their financial security, or it was currently better for them to pay off mortgage or student loan debt.”

I doubt it. Given the KiwiSaver incentives — which double or triple people’s contributions, and more in the first year — it would be a rare investment that performed as well.

Same goes for repaying mortgages and student loans. Normally it’s great to get rid of debt — especially credit card and other high-interest debt. But number crunching shows you will almost certainly end up wealthier in KiwiSaver than making extra payments on a mortgage or student loan.

More than a quarter hadn’t got round to joining.

For every month you delay, you miss out on up to $87 of government money — as well as compounding returns on all contributions.

For the young, putting off joining for two years could mean retiring with $100,000 less. Sure, inflation will erode that. But at 2 per cent inflation over 40 years, it would still buy what $45,000 buys today — not a bad round-the-world retirement trip.

A quarter worried about lack of security, or that the government may make the scheme less attractive.

On security, there are KiwiSaver funds run by solid institutions that invest only in government and bank securities. That’s about as safe as it gets.

On changes, yes, governments are sure to dabble with the scheme. But that’s all the more reason to join now, while it’s so good. If you don’t like future changes, go on a contributions holiday.

I can’t imagine a government stopping those holidays unless it makes KiwiSaver compulsory. And in that case you will be put into the scheme anyway — and wishing you had joined now, when the incentives were so powerful.

Interestingly, only 16 per cent of non-KiwiSavers said they hadn’t joined because their money is locked in — usually until retirement or buying a first home. Meanwhile, 32 per cent of members said they joined partly because of the lock-in — presumably because they would otherwise be tempted to spend the money before retirement. It takes all sorts!

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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.