KiwiSaver Guide
10 Must-Know Facts Revealing Everything You Need To Know About KiwiSaver
Updated 12 September 2019
An important warning to every employee in New Zealand
- Would you say no to a pay rise with no strings attached? Employees all over New Zealand are saying NO to a pay rise by opting out of KiwiSaver. In most cases, it’s a massive mistake for financial security later on.
- Our view is simple - KiwiSaver is an excellent savings scheme which, with proper planning and a commitment to regular contributions, can make retirement more comfortable and provide more lifestyle options.
- Being cash poor in retirement is no fun at all - KiwiSaver aims to take a little now from every payday, and with proper investment management by your provider, return a sizable fund when you hit 65.
- This guide address ten essential facts about KiwiSaver, including the benefits, costs and limitations.
10 Must-Know KiwiSaver Facts
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KiwiSaver is voluntary and free to join, but there are ongoing feesWhen you join KiwiSaver, you either pick a fund you want to invest in, or if you can’t decide, the IRD picks one for you. After that, your employer must contribute the value of 3% of your gross salary into your KiwiSaver fund. You will also have to contribute at least 3% of the gross amount. The only fees you’ll pay are those charged by your fund, which comprises of two annual fees. There is a management fee, usually anything from 0.25% to 2.00% of the value of your fund, plus a membership fee (generally under $50). If you had $10,000 in a KiwiSaver fund that charges 0.50% management fee and $30 annual fee, you would pay $80 ($50 + $30) per year.
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​KiwiSaver makes you financially better off overall if you do joinIn almost all cases, the average New Zealander will be worse off in the long-term if they don’t contribute to a KiwiSaver fund. Our example of Max explains things better:
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​The Government gives you an annual payment for contributing to KiwiSaverIf you invest over $1,100 per year in your KiwiSaver fund, the government will add in another $500 every year. These contributions soon add up – over 40 years, government contributions can be worth over $20,000.
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​Being a KiwiSaver member gives you first-home ownership helpKiwiSaver members can withdraw their investment to put down a deposit for their first home. With banks now needing at least 15% to 20% as a deposit, a KiwiSaver balance can be a big help. This scheme is called the KiwiSaver First-Home Withdrawal, and our guide covers it in detail. Also, if your salary and house price qualifies, you can also get a hefty grant to help you with the deposit – our guide to the KiwiSaver HomeStart Grant covers this in detail.
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You decide how your money is invested by picking an ‘appropriate’ fundKiwiSaver can be as low-risk or high-risk as you want. Generally, each scheme (i.e. Simplicity, Westpac or Milford) will provide 3-5 funds to pick from. These are usually known as:
Conservative Funds – these funds largely in fixed-income and cash deposits (80%), with some exposure to investments in the sharemarket (20%). Most of the fund's return can be predicted year-on-year, and this is, generally, the safest fund-type available. Balanced Funds – these funds are a bridge between the Conservative fund above and the Growth fund below, offering a midway point for someone looking for higher returns without high risk. As such, a Balanced fund will usually invest 50% of its money into shares, and 50% in fixed-income and cash. Growth Funds – these are the most aggressive fund offered, with usually around 80% or 90% of the money invested in shares. The return and value of such funds will depend heavily on how international sharemarkets are performing. What fund type you pick depends on what you feel right for your retirement needs. Generally, younger people pick growth funds, and as they reach the retirement age, they move their money to a balanced fund. Once they are retired, conservative funds are popular to protect the money saved. |
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You have full control over where your money is invested and can change fund anytimeThere is a wide misconception amongst New Zealanders that once you’ve decided on a fund, your money is stuck there until you are retired. This isn’t the case at all – you can switch funds and providers at any time, and the paperwork is limited to one or two simple forms. Schemes like Simplicity acquire at least half of their members from switches – flexibility is at the heart of KiwiSaver. If you decide a growth fund isn’t where you want your money to be, your provider can switch it to a lower-risk fund within a day in most cases. If you switch providers altogether, it shouldn’t take more than five working days.
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There are very few instances where you can withdraw your KiwiSaver before the age of 65KiwiSaver was not designed to be a money pile for dipping into. If you are moving overseas permanently, you can withdraw your balance (excluding the government contributions). If you’re buying your first home, you can use your KiwiSaver to help pay for the deposit. If you are in genuine financial hardship, you can also make an application – our KiwiSaver hardship guide has more. If you have a life-threatening condition or terminal illness, you can also apply to withdraw your balance. Other than that, there is little opportunity to withdraw your funds before you hit 65. If you are looking to use KiwiSaver as a ‘rainy day fund’, it probably is not the right investment choice.
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As a KiwiSaver investor, your provider will keep you up-to-date with your fund performanceAs a member, you will receive an annual personalised statement – this contains your investment’s current balance, your balance a year ago and fees, in dollar figures, paid to the fund manager.
KiwiSaver providers also publish quarterly updates, which they may or may not send to you. They contain how your fund has performed in the last three months, and how that performance compared to the previous 3 months and the benchmark the fund is measured against. Many providers also offer online access so that you can check your KiwiSaver balance at any time. |
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You can be a KiwiSaver member but not contributeMany New Zealanders are members but don’t contribute to their fund. This situation is called a ‘savings suspension’. Many people do this if they have higher priorities for their money, such as high-interest debts and family-related costs. The savings suspensions last for up to one year but can be extended indefinitely.
The downside to a savings suspension is that your employer won’t make any contributions, and your KiwiSaver provider will continue to charge fees on your balance. |
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KiwiSaver fund fees make a difference to your overall investment performanceIf your average return before fees is 5.00%, and your annual fee is 2.00%, you will be giving 40% of your investment’s returns to your provider. Over time, this can add up – even 1% on a $40,000 balance charged annually for 25 years means a loss of $11,000.
A popular way to decide on which fund to invest in is to look at the net returns after-fees for the last year, five years and ten years. If a fund charges a 2.00% fee but has returned 15% per year on average, it is better performing than a fund that charges 0.50% and returned 5.00% per year on average. The Sorted FundFinder tool can help you decipher which fund is best for your needs. |
