Understanding KiwiSaver: Your Guide to Financial Security
Table of Contents
Intro
KiwiSaver is New Zealand’s Government led retirement savings scheme, designed to help Kiwis build a nest egg for their future. For most people it’s a great choice to get involved in, but there are always risks. In this blog, we’ll explore the ins and outs of KiwiSaver, its benefits, and why it’s crucial to get involved, Plus, we’ll discuss the implications of not investing in KiwiSaver and how it can impact your financial wellbeing, but on the flip side, we’ll talk about the unlikely risks, and who might want to avoid contributing to Kiwisaver.
Please note: This article is not designed to be financial advise of any kind. It’s only to be taken as an opinion and you should seek the advice of a financial advisor.
What exactly is KiwiSaver?
KiwiSaver is a voluntary savings initiative introduced by the New Zealand government in 2007. It’s. a form of superannuation. It encourages New Zealanders to save for retirement through a mix of personal contributions, employer contributions, and government incentives. There are many investment options to choose from depending on your appetite for risk.
How KiwiSaver Works
Joining Up:
KiwiSaver is optional. You can join through your employer or sign up directly with a KiwiSaver provider. If you start a new job, you’ll be automatically enrolled but can opt out within a few weeks if you choose. AMP is an example of a Kiwisaver provider.
Contributions:
You decide how much to contribute from your pay at the time of signup – your options are 3%, 4%, 6%, 8%, or 10%. Your employer must chip in at least 3% on top of your contribution. You can alter this contribution at any time.
Government Boost:
Each year, the government adds to your savings with a member tax credit of up to $521.43, provided you contribute at least $1,042.86 annually. This definitely helps with your end sum, so if you’re not really wanting to invest much, invest at least the $1042.86 to make this gain.
Investment Options:
KiwiSaver funds are managed by different providers, offering a range of investment strategies from conservative to aggressive. Your money is invested in shares, bonds, property, and other assets based on your chosen fund.
Here’s a list of some KiwiSaver providers in New Zealand:
AMP Wealth Management New Zealand Limited
ANZ New Zealand Investments Limited
ASB Group Investments Limited
BNZ Investment Services Limited
Booster Investment Management Limited
Craigs Investment Partners Superannuation Management Limited
Fisher Funds Management Limited
Generate Investment Management Limited
Kiwi Wealth Limited
Mercer (N.Z.) Limited
Milford Funds Limited
New Zealand Funds Management Limited
Simplicity New Zealand Limited
Summer KiwiSaver Scheme (Forsyth Barr)
Westpac New Zealand Limited
SuperLife Limited
JUNO KiwiSaver (by Pie Funds)
Why KiwiSaver is Worth It
Employer Contributions:
Your employer’s contributions significantly boost your savings without any extra effort from you. It might not seem like much, but the compounding investment you have with your employers contribution will make a big difference at retirement.
Government Incentives:
The annual member tax credit is essentially free money, making KiwiSaver an attractive savings vehicle.
Flexibility:
KiwiSaver offers flexible contribution rates and investment options. You can adjust your contributions and switch funds as your financial situation and risk appetite evolve.
First Home Purchase:
You can use your KiwiSaver savings (excluding the government contributions) to help buy your first home, making it a valuable tool for first time homebuyers that find it hard to enter the New Zealand housing market. Let’s face it, buying a house seems out of reach for a lot of people, so this is a good partial solution.
Retirement Security:
KiwiSaver’s main goal is to provide financial security in retirement, ensuring you have a steady income stream when you stop working.
The Consequences of Not Investing in KiwiSaver
Choosing not to participate in KiwiSaver can have significant long-term implications. Without the boost from employer and government contributions, your retirement savings might fall short, leaving you financially vulnerable in your later years. Additionally, you’ll miss out on the potential growth from compounding returns, which can substantially increase your savings over time. Not having a robust savings plan could mean working longer than you’d like or relying solely on the government pension, which might not be enough to maintain your desired lifestyle.
The Downsides of KiwiSaver
While KiwiSaver offers many benefits, it’s important to consider the potential downsides:
Market Risk:
Like all investments, KiwiSaver funds are subject to market fluctuations. This means that your savings can increase or decrease in value depending on market conditions. While historically, markets tend to grow over the long term, short-term volatility can result in temporary losses.
Limited Access to Funds:
Money invested in KiwiSaver is generally locked in until you reach the age of 65, with a few exceptions such as purchasing your first home or severe financial hardship. This lack of liquidity can be a disadvantage if you need access to your funds before retirement.
Fund Performance Variability:
Not all KiwiSaver funds perform equally. The performance of your fund depends on its investment strategy and the skill of the fund managers. Choosing a poorly performing fund can result in lower returns.
Fees and Charges:
KiwiSaver funds charge management fees, which can eat into your returns over time. It’s essential to understand the fee structure of your chosen fund and ensure it’s justified by the performance and services provided.
Inflation Risk:
Over the long term, inflation can erode the purchasing power of your savings. While investing in growth-oriented KiwiSaver funds can help combat this, it’s still a risk to consider.
What if KiwiSaver Fails?
The possibility of the entire KiwiSaver scheme collapsing is extremely low due to the regulatory framework and the diversified nature of the funds. However, if a particular KiwiSaver provider were to fail, your investments are generally held in a separate trust, which means they are protected from the provider’s financial troubles. The Financial Markets Authority (FMA) oversees KiwiSaver providers to ensure they comply with regulations and maintain financial stability.
Making the Most of KiwiSaver
Start Early:
The earlier you start, the more time your money has to grow through compound interest.
Maximise Contributions:
Aim to contribute at least $1,042.86 annually to get the full government tax credit.
Pick the Right Fund:
Choose a fund that matches your risk tolerance and financial goals. Regularly review its performance and make adjustments if needed.
Stay Informed:
Keep an eye on your KiwiSaver account and make changes to your contributions and fund choices as your financial situation and market conditions change.
Who Might Opt Out Of Kiwisaver & Why?
While KiwiSaver offers numerous benefits, it isn’t the ideal choice for everyone, particularly for those who are financially literate, have specific investment preferences and business owners. Individuals who prefer having liquid assets might opt out of KiwiSaver due to its restriction on accessing funds until retirement. Investors with a higher risk tolerance might seek investment opportunities with potentially greater returns and more flexibility compared to the structured options available within KiwiSaver.
Business owners, in particular, might find more strategic ways to utilise their money. Investing directly into their business could yield higher returns than those typically offered by KiwiSaver funds. By reinvesting profits back into their business, in combination with taking loans for equipment or assets that improve productivity, business owners can potentially drive growth, increase their company’s value, and generate higher personal income in the long term if things go well.
Additionally, savvy investors might prefer to manage their own investment portfolios, selecting stocks, bonds, or other assets that align more closely with their risk tolerance and financial goals. This autonomy allows them to potentially outperform the returns from KiwiSaver, especially if they have the expertise and resources to navigate the financial markets effectively.
Conclusion
KiwiSaver is a smart way to secure your financial future or to hedge against income loss. By understanding how it works and making informed decisions, you can maximise the benefits and ensure a comfortable retirement. In essence, it’s a back-up plan, just in case you don’t make your millions, so don’t miss out on the advantages that KiwiSaver offers.
Again, we’re not financial advisors, but hopefully you’ve found this finance blog helpful.
by Ash Horton
22/07/2024
Ash is a professional content writer with extensive experience in business development in the financial services. Ash has founded businesses from the age of 19, including franchising ventures, and working alongside some of the largest retailers in the world.