The biggest winners and losers from the Government's KiwiSaver changes

NZ Herald

2 days ago

Young people are the only clear winners in the Budget announcements about KiwiSaver.
True, every employee's KiwiSaver balance will grow faster when they and their employers increase their contributions – from the current 3% for most people to 3.5% next April and 4% from April 2028.
But Treasury has said many employers will get that money back by giving employees smaller wage rises, so in the end employees will really pay all the extra themselves.
The same goes for employees on total remuneration – a practice that should be banned – in which employees effectively pay their employers' contributions.
Meanwhile, the Government's contribution will halve, to a maximum of almost $261 if you contribute $1042.86 or more during every July-to-June year, starting this coming July 1. And people earning $180,000 or more will get no Government contributions.
The biggest losers are probably the self-employed and those not employed. Their only KiwiSaver incentive is the Government contribution, and the halving makes it considerably less attractive. Still, it's worth getting. If you save $20 a week and your savings outside KiwiSaver would have been $100,000, in the scheme they will be $125,000.
Back to the young ones. At the moment, under-18s receive no KiwiSaver Government contribution. And their employers don't have to contribute either, although some do. But from July 1 next year, 16- and 17-year-olds will get the Government money, and from April 1 next year, employers will also be obliged to put in their 3.5%.
Young people, like everyone else, don't have to join KiwiSaver. While they will be automatically enrolled in the scheme when they get their first job, they can opt out if they wish. But I've always encouraged teenagers not already signed up by their parents to join and start the savings habit – with their eye on perhaps withdrawing soonish to buy a first home.
The introduction of Government contributions from age 16 gives that idea even more appeal. Even though we're talking small amounts here, it adds up.
What's more, once a child is 16, you and other grandparents, parents or friends could make a point of together depositing enough – a total of $20 a week – so that at least $1042 a year goes into the teenager's account.
Then they'll receive the maximum $261 from the Government. Try to continue to do this until the young person starts fulltime work.
I heard somebody on the radio the other day suggest that every newborn should be enrolled in KiwiSaver. Great idea. In the meantime, let's get as many young ones in there as we can.
Only parents and guardians can sign up their children for KiwiSaver, but presumably you could encourage this to happen.
And you could suggest the parents choose from low-fee aggressive KiwiSaver funds that make similar investments to the fund your grandchildren are in now. While these share funds are volatile, they usually have the highest long-term growth.
Ideally, though, the parents will pick a global fund rather than a US one. While American shares make up about 70% of the value of all world shares – and they have performed particularly well in recent decades – in the long run, the widest possible diversification works best.
The parents can find suitable aggressive KiwiSaver funds in the Smart Investor tool on sorted.org.nz by sorting by 'Fees (lowest first)'.
We should note, though, one downside of saving for children in KiwiSaver as opposed to elsewhere. The money can't be withdrawn for, say, uni fees or starting a business. And not everyone wants to buy their own home. So their KiwiSaver money might sit there until they reach New Zealand Superannuation age.
The upside is that the money will grow hugely over such a long time.
Join KiwiSaver after 65?
Q: I'm 66, still working and intending to work for a few more years yet. I have cashed up my KiwiSaver to pay off my mortgage.
Is it worth my while to start another KiwiSaver account, or should I just set up a regular savings regime with a fund manager instead?
A: When KiwiSaver started in 2007, you couldn't join if you were over 65, although once you were in, you could keep an account running into retirement. But since 2019, every New Zealand resident of any age can join.
Unfortunately, though, some over-65s don't realise that, which is a pity, as KiwiSaver can work well during retirement.
Generally there are no inducements for over-65s to join. The Government stops its contributions at 65 and employers don't have to contribute, although many still do, so you might want to check that out with your boss.
But even without 'the extras', I still think it's worth being in the scheme. Fees tend to be a bit lower than on non-KiwiSaver funds. And providers are regularly surveyed by Te Ara Ahunga Ora, the Retirement Commission, on the services they offer, which puts pressure on them to treat members well.
Also, while there are no Government guarantees, it seems that the Government watches KiwiSaver providers' behaviour more closely than other investment providers.
In retirement, you can use your KiwiSaver money in whatever way works best. Your first withdrawal will involve a bit of form-filling, but after that you can take out lump sums whenever you want to – bearing in mind it might take a couple of days to receive the money. And many people set up regular transfers to their bank account to add to their NZ Super payments.
Continue ex's life insurance?
Q: When my husband and I divorced, I kept up the payments on his life insurance premiums. I took quite a hit financially as a result of the divorce and now any modicum of comfort in my retirement depends on him dying before me.
It's not a great mindset to be in, to wish someone a happy life but not a particularly long one! And yet financially doesn't it make more sense for me to keep paying the premiums in anticipation of a lump-sum payment that I wouldn't otherwise be able to save?
A: If this were crime fiction, your ex would be looking behind every tree for the hitman you hired!
Back in the real world, I want to suggest you cancel the policy and invest the premium money elsewhere – because if your ex stays alive for many years, you will have little for your retirement. And he might outlive you – and you'll get nothing.
But first I asked Peter Leitch, a financial adviser and insurance expert with Share NZ, if you're likely to get a surrender value or some other compensation if you stop the policy now.
'Some older life policies, called whole of life, or endowment, may have a cash surrender value,' Leitch says.
'If the policy is cancelled, she could get this value now. Or she may be able to stop paying the premium but retain the policy in place (called 'paid up'). And it may be possible to do both – get some cash value out and keep a lower level of insurance coverage in place. So, advice matters.'
Leitch adds: 'Your correspondent has a dilemma. Often retirement income is reasonably fixed, but the cost of life insurance premiums will usually increase each year.'
He suggests she should check several things:
Is the premium fixed to a specified age (level premium), or does the premium change annually (stepped premium)? Premiums increase reflecting the chance of claiming. And it can get (very) expensive as you age.
Life insurance is not an investment. You are paying for peace of mind and security. It seems like neither of these apply.
Is the policy ownership in her name? There is no point paying for a policy which is owned by him, as proceeds will go to the policy owner (or their estate).
'Retirement should be enjoyable and rewarding. Paying for life insurance for a person where the relationship has changed may not bring you joy, or a reward!
'I'll finish by saying if you insure a car, you are not going to keep insuring that car after you have sold it. The insurance did the job while you had the car, but after the need has gone, the insurance has done its job.
'I have seen people keep insurance far too long on the basis that they believe they should get a return on the premiums paid. That is not how insurance works.'
Time to talk to a life insurance expert.
Gold not so shiny
Q: Last week's correspondent, Richard Coleman of NZ Gold Merchants, is talking his books. Compared with income-generating investments like shares and property, gold is a poor relation. It has its moments, but following the 1980 gold crash, it took 27 years to reach the same level. Then there's the buy/sell margins, cost of storage, security and insurance.
Gold bugs often regurgitate the 'hard to find' nonsense, or 'we're running out', but new technology ensures more gold is being mined each year. Ask those who purchased in 1980 if it's 'inflation-resistant'.
A: Of course Coleman was presenting the positive side of investing in gold last week. In response, I pointed out the almost halving of the gold price from 2011 to 2015, and you have pointed out the earlier big drop, when the price more than halved in the early 1980s and took decades to recover.
So yes, it's a pretty volatile investment. But a little gold does bring some diversification, as Coleman pointed out.
Okay, we've had both sides now. As the old-time editors used to say, 'no further correspondence on this topic will be entered into'.
A dollar is a dollar
Q: I find myself in a similar situation to the 55-year-old two weeks ago with investments in growth funds. You suggested that she gradually moves some of her savings to medium-risk and low-risk funds as she nears retirement.
However, my approach is to leave the KiwiSaver and non-KiwiSaver investments in growth funds, and for the next five years focus on saving into a balanced fund, and then for the following five years focus on saving into term deposits.
That way I get maximum growth over the next 10 and five years. Also, I can top up the balanced and term deposit buckets in the future if required. I would be grateful to hear your thoughts on this approach.
A: Your approach and mine should have similar results. The aim is to have, at retirement:
Money for the next three years or so in a cash fund or bank term deposits.
Money to spend roughly three to 10 years away in a bond fund or balanced fund.
Longer-term money in growth funds or similar – for spending later in retirement.
As you near retirement, if it seems you will have too much or too little in any of those categories, you can always move some money then.
In the meantime, both you and the earlier correspondent will have a portion of your savings in growth funds and a portion in medium-risk funds for the next few years. After that, you'll also have some at lower risk.
It won't make any difference whether the particular dollars in each of those categories was saved recently or years ago. A dollar is a dollar. But if you find it easier to allocate your savings your way, go for it! It does have a certain simplicity.
* Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions 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. Send questions to [e-mail]. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.