By Amanda Morrall
Is KiwiSaver still a good investment?
It's a question close to 1.7 million members will be asking in the wake of National's announcement that it will downsize the national savings programme only four years after it was introduced. See Alex Tarrant's article here on the cuts.
While Government pledged to keep the $1,000 kick-start as an incentive to join, it has backed down on a previous promise to continue matching employee contributions $1 for $1 up to a maximum of NZ$1,043.
Technically speaking that promise came with a best-before date so by John Key's rules, if National gets voted back in, Government won't have broken its promise, so much as revised it.
In any case, it's a luxury Government (the people) can no longer afford unless we want to remain permanently indebted to foreign lenders, explains Mr. Key.
To date, Government has spent NZ$3.3 billion on contributions to the scheme, which has proven wildly more popular than expected.
Treasury originally projected a membership roll of 680,000 --- two years from now in June 2014.
A 50% cut?
It is broadly speculated that it will be halved to NZ$521.50 a year with employers and employees nudged to make up the reduction with added contributions from their end.
If that happened overnight, individuals who wanted to keep their savings at current levels would be required to pitch in an extra NZ$260.75 per year, NZ$2,607 over 10 years, NZ$5,215 over 20 or NZ$10,430 over 40 years.
Providers, for their part, don't seem too worried. Regardless of a reduction in member tax credits, they view the scheme as a great way to save for retirement. It's more or less what you'd expect them to say as they stand to profit in a not unsubstantial way the longer you stay invested.
For interest sake, I punched in the numbers on my own KiwiSaver account and discovered that in 25 years time I'll have paid my provider NZ$32,000 to manage my retirement savings account, that's around 7.3% of my total earnings.
As I don't have a crystal ball, and don't know how my fund will have performed in that time, or what my returns will be, it's difficult to say whether they'll have earned that fee. At the moment, it's not looking like I'll be getting my bang for my KiwiSaver fees. (See our KiwiSaver fees and expenses section here.)
The average balanced fund has produced an annualised return of 1.9% (after fees) over the past three years while conservative funds have delivered close to 5% while some exceptionally high performing funds are in double digit territory. (See our KiwiSaver performance ranking list here).
To be sure, fees are a separate issue but KiwiSavers who want to know how they'll fare out of all this at the end of the day (or when they reach age of eligibility) need to do their math. (See interest.co'z cost benefit calculator here to experiment with the numbers).
So how will reduced tax credits impact your fund?
Should they disappear altogether (and you don't make up for it in ramped up contributions) in 10 years time, you'll be NZ$13,774 poorer for it, assuming that money would have earned 5% in returns. Over 40 years, it's a more painful outcome, a potential sacrifice of NZ$132,000.
Without question, KiwiSavers will be poorer without the benefit of the tax credit as it stands.
Reason to panic?
Fund manager and financial commentator Janine Starks maintains a 50% haircut on member credits isn't so bad.
"It would be a terrible travesty if the whole tax credit was going, but if they are cutting it back to half it's more of a haircut in times of austerity and we all have to expect that a bit if Government hopes to make a serious dent in the debt.''
By cutting tax credits in half, it's possible Government will save itself NZ$500 million a year. See Bernard Hickey's opinion piece on the KiwiSaver cuts here.
Key said Wednesday Government is aiming to reduce spending by NZ$5 billion a year through a combination of changes to Working for Families, student loans and KiwiSaver.
Starks suggests KiwiSavers are getting the light end of the stick.
"For a vast majority of people who can see the position Government is in and who have secure jobs, they'll be able to push their savings a fraction more, so as not to compromise their retirement savings.''
'Don't be stupid'
KiwiSaver Max author Mary Holm agrees the signaled changes are no reason to quit KiwiSaver or to abstain from joining the scheme.
"It's still a case of people being stupid if they don't join,'' she says bluntly.
Holm maintains KiwiSaver is still a good deal if for no other reason than you get NZ$1,000 for free.
The NZ$1,000 sweetener aside, Holm still regards KiwiSaver is a decent investment.
One: it's a forced savings habit that allows you to build wealth on your own steam with your employer pitching in and your fund manager theoretically making you a decent after tax and after fee return.
Two: it's a good way to save for a deposit on a first time home because after a minimum of three years you can withdraw your and your employer's contributions, plus the returns and put it towards the house.
That aspect of the scheme remains unchanged, well for now.
And yet Holm admits that for some folks, particularly younger Kiwis who are already home owners or who have no interest in ever becoming home buyers, the advantages of KiwiSaver may be more questionable with the added NZ$1,043 stripped from the equation.
While the first year "turbo-effects" of KiwiSaver make it an attractive proposition, going forward (with reduced or no member tax credits) Holm suggest, the investment prospect become a bit more uncertain weighed up against a higher returning alternative, say a rental property.
"It's possible you'll make better returns somewhere else.''
32 Comments
Gosh, 1.7m NZ’ers didn’t see this coming. I believe there will be more cuts to the government subsidies over the life of the scheme. However the fees and poor investment performance remain and you are locked in! The $1000 will with inflation look pretty paltry if there are significant years till you retire. Ah – take a contributions holiday I hear you say. Well only if the IRD approves and this is at their discretion, not guaranteed. And guess what, the fees don’t take a holiday.
What a dog!
No, the IRD doesn't have to approve a contributions holiday.
Fees and investment performance apply to all managed funds, some are cheaper and/or deliver better returns than others, that's not specific to KiwiSaver.
Of course you could avoid the fees, and you might be able to deliver a better return, if you were prepared to put in the time and effort to learn to manage your savings yourself.
But the same applies to all sorts of activities. You could avoid having to pay plumbers and electricians, and you might get better pipework and electrical wiring for your home, if you were prepared to put in the time and effort to learn that skill yourself.
But plumbers and electricians are still in business, because many people recognise that they themselves do not have those skills and do not think it a worthwhile use of their time to acquire them. Similarly, KiwiSaver exists for those people who can't or don't want to learn to manage investment themselves. Those who can, should - and are free, nay welcome, to.
Incorrect MdM you apply to the IRD for a contributions holiday and they grant it at their discretion, read the fine print.
In terms of ROI you can currently get equal or better to most providers thru Term Deposit with no fees. Especially if you use AU banks and ride the $AU appreciation. Little time involved at all, well less than the huge timewasting many people are spending chasing their KS contributions and other form filling.
Partially correct Laurence, IRD have discretion only during your first year's membership, after that it is a right.
What on earth are you talking about, huge timewasting? You don't have to do anything at all to be auto-enrolled into KS when you start a new job. Your employer makes the deductions from your salary, and passes that and his own contribution to IRD, and they pass it on to your provider. Your provider then collects the Government contribution and puts it into your KS account. None of that involves any activity at all on the part of the KS member.
Yes I believe you are correct. However what stops the gov changing the rules in the future, making it far more difficult to take a contributions holiday. I've joined up solely for the tax credits and the $1000 kickstart, and am only making the minimum $1000 odd per year as I am self employed. However now there is no point in me contributing any more, if the tax credits are removed. The amount I have saved will now probably now be eroded away in the form of inflation and provider fees.
Check the KS rules MdM. Contribution Holidays are at the IRD’s discretion, there is no guarantee in the legislation. Also the 5 year max holiday is a guide not a law. The government will change this as they have already changed so much since the schemes inception.
Huge time wasting is feedback from colleagues who unfortunately were conned into joining. Many have spend considerable time following up on where there contributions are the status of their account. This is more onerous on those who had the audacity to choose another provider over the government default or employer preferred.
A very good comment below regarding the ability for a future government to link your KS to superannuation and therefore reduce the pension for those with KS balances. Not only Hotel California but a Big Brother scheme as well. So glad I’m not a part of this. Good luck suckers.
Here is a direct, unedited copy-paste of what it says about contributions holidays on the KiwiSaver website
http://www.kiwisaver.govt.nz/already/change-contrib/contributions-holiday/ks-holiday.html.
What is the source of your information? Where do you see it stated that IR have discretion?
(quote) Can you get a contributions holiday? All KiwiSaver members who have been making contributions from their pay for 12 months or more can take a contributions holiday. You don't need to provide a reason.
How long is a contributions holiday? If you've been making contributions to KiwiSaver for 12 months or more, you can take a contributions holiday of between 3 months and 5 years. In some cases Inland Revenue may agree to a holiday of less than 3 months.
There's no limit to the number of times you can take a contributions holiday and you can renew it at any time.
Early contributions holiday: An early contributions holiday allows you to take a break from making contributions within the first 12 months of becoming a KiwiSaver member.
Can you get an early contributions holiday? Inland Revenue will only consider an early contributions holiday where you're experiencing, or likely to experience, financial hardship. You'll need to provide evidence of financial hardship, for reasons outside your control, to support your application. If your financial circumstances have changed for reasons within your control or discretion, Inland Revenue may not accept your application. (unquote)
And here's what it says in the legislation: The Commissioner must accept an application for a contributions holiday (KiwiSaver Act, section 104, paragraph (1)).
Your colleagues must have been unlucky or unwise in their choice of provider, for I've not found it at all difficult or time-consuming to establish the status of my KS account and to re-allocate my savings across different funds within the same provider. It's no less (and no more) straightforward than following the progress of savings in non-KS managed funds; the only differences are, that it was less trouble (ie, no action on my part at all) to open the account in the first place, and the Government and my employer have made contributions on top of my own (again, requiring no action on my part at all) such that there is now far more money in the account than what I've personally put into it.
Yes, a future Government might decide to means-test superannuation against my KS balance. But why would they be likely to means-test only against KS assets when they could save much more money by means-testing against all my financial assets, and/or against my income if I choose to keep working after 65 (or whatever age)? Many contributors to this site seem to believe that Government should indeed do precisely that, but I don't agree with them.
In any case nobody's ever said it's the only or the best way to save, particularly not if you're a motivated, disciplined saver and a competent investor. It's supposed to be an easy option for people who aren't, and it is that.
Well done MdM reading the brochure which is more than most have done. You quote correctly that it says (1) ‘In some cases Inland Revenue may agree…’ and (2) Commissioner must accept an application. So the IRD does have the role to approve (or not in future) contributions holidays. The Commissioner must accept an application does not mean he/she is going to approve it. Ever dealt with the IRD and their lawyers much? I certainly would not like my retirement savings to be at their pleasure.
And of course the government can always change the legislation to make the scheme even worse as they have consistently done since its inception only a hand full of years ago. Extrapolate from that how possible it is that there will be further changes till you retire (see your money again). I suggest now that you are locked in there is very little chance that they will be motivated to make it more attractive for you to join!
And of course even if you take a contributions holiday the fees and poor investment performance don’t. They just carry right on eroding your money. Good luck.
Oh, all right, here is a fuller extract from the KiwiSaver Act. I've simplified a bit but you are welcome to look for yourself.
Section 104, para 1: The Commissioner must accept an application for a contributions holiday, and grant a contributions holiday, if the Commissioner is satisfied that the person meets the requirements of section 102, and the application is made in accordance with section 103.
Section 102: A person [who is having KS deducted from their wages] may apply for a contributions holiday -
(a) at any time [if they are suffering financial hardship] or
(b) at any time after 12 months have expired since [the start of the applicant's KS membership].
Section 103 sets out the (pretty basic) information that has to be included in the application - name, tax number etc. There's no requirement to give any reason or justification if you're not claiming financial hardship.
In short, it's absolutely clear, in the legislation, that KiwiSaver members have an absolute right to take a contributions holiday once they can prove 12 months' membership.
Yes, some KS funds have delivered less good returns and charge higher fees than others. That's just the same as other superannuation and other savings funds - some are better than others, and people prepared to put in the effort to shop around are likely to get a better deal than those who aren't.
Yes, things are changing and they might change again for KS members in future. So they might for you. But in the meantime the Government has made a much larger contribution to my savings than they have to yours. It's a b-y terrible deal for the taxpayer, but I'm pretty happy with it as an individual. Let's both be happy ... ;-)
Once they get a certain percentage of the population on it, I can see it becoming compolsory, and when that happens I can see they will remove the $1000 kickstart and other tax benefits to lure people in. That is why I joined, at least I get a couple of years of benefits.
It never was an "investment"
I looked at it as a small punt...sort of like buying a lotto ticket.
I just checked today and since 2008 I have deposited $2,174 of my own money.
The govt has added to my fund to get the total contribution to $5,386.
Gareth Morgan has weaved his magic over this time to get my balance to the grand total of $5696.
I will continue with it but only to the extent of what the Govt will match.
Otherwise no point.
"Holm maintains KiwiSaver is still a good deal if for no other reason than you get NZ$1,000 for free."
You do not get $1,000 for free. What a load of crap. "Maybe" you will get it if you live to over 65 and the successive govts over the years dont stuff things or your kiwisaver provider doesnt lose your money or steal it through excesssive fees.
It's a giant vote buying pork scam. In 2014 National will trim more off and by 2017 bugger all will be left other than what you put in. Gareth meanwhile is enjoying his motorbiking trips on the fees he creams off the top of your pile which his staff put into the sharemarket. They can't lose. You can. Twice! because you still have to pay the taxes in the future to cover the govt contribution...sucka.
Yeap will agree with you..it's not going to make you rich..but with me and my family it makes up a small part of our overall portfolio so to speak.
I do it as I get an extra 2% from my employer, my Wife has a work retirement scheme, which is dollar for dollar plus what it makes this we can take out as cash now at any time and she can pump in up to 7% of her gross (which we do)
We have a mortgage and three young children and firmly believe by time we get to 65-67 government wont supply much.
Why not put all our Kiwisaver into the Mortgage...well I believe you need a balanced portfolio, some savings, term deposits, and retirement funds (we can afford to to this now maybe not in the future? WHo knows)..my Mother put all her mony into paying of her house...she is close to retirement....earthquake has come along..house is buggered but covered by insurance..but her value in the house would be half by now ..that may come back after about 10 years..but she will not be able to wait 10 years to get her money out.
So for us it works for now as we can afford it..down the track maybe not..but old saying make hay while sun shines.
Great WAS if it is just a punt for you and you have other retirement plans (lotto excluded). However if you are a reasonable wage/salary income earner you do not have the option to limit your contributions to ‘only the extent of what the government will match’. Indeed the government is about to up the amount sal/wage have to put in to substitute for their withdrawal.
Good luck to all those who were bribed to join. I hope your age means the period you are locked in is not long.
My prediction is there will now be a run of people for the contributions holiday and guess what, the arbitrary guidelines on this will be tightened by the IRD and/or government.
I have to continue the theme, it never was a good investment.
I never bothered because I could not see a good outcome. I have had the misfortune to be involved in two non voluntary schemes and one earlier on that my parents started for me. They were all a complete disappointment and I can't see that changing. The last one was abysmal and lost 10% two years running and 1% the third. Only thing that kept it in anyway worthwhile was the 2:1 contributions.
If you add in the peak oil argument, then it makes it look even more dubious.
23 KiwiSaver bones to chew on,
Submitted by a reader who choses to remain anonymous.
1. You need to look at the changes from the different stakeholder’s perspective.
2. From the countries perspective it does not make sense to borrow money from overseas people to give to the rich by way of MTCs only to have to tax the poor more to pay the interest on the debt and the debt itself. It might be different if the borrowings were used to create productivity but they do not.
3. This problem simply reflects part of the reason why KiwiSaver was a poor policy decision in the first place. Besides all the global evidence showing that tax incentives do not increase savings and history tells us that there are economic downturns and crisis we set up a scheme based on tax incentives and a high tax paid subsidy that was poorly targeted. Why do you give a baby $1000?
4. From the countries perspective we should simple get rid of KiwiSaver and write it up as a learning experience. It is better to get rid of it sooner rather than later as it will do less damage.
5. From the politician’s perspective, it is about reducing the deficit so we are acting fiscally prudently but not hitting the individual so we can still be elected or more importantly we do not lose any votes over it. Most Labour people will vote Labour even if KiwiSaver was increased and so what Key and English has done (when we know the detail) was probably okay
6. The comments from Phil Goff are simply il-informed, incorrect and political rhetoric and designed to shore up his support. He would be better to come out and comment that constant change is bad – stability is needed and we will look to get agreement across party lines so New Zealanders have stability in this crucial long term area. Unfortunately leadership is not a quality he has.
7. Phil Goff’s alternative would be to go to the election and say we will wind it up, pay it out and start again with an Aussie style scheme with a 6% employer contribution and no tax incentives.
8. From the employer’s perspective it is probably all bad news. Employers need stability more than anyone else. This change means they have to stop making widgets and address what the changes mean to their business and their employees. This is unproductive use of time. Christchurch employers in particular probably do not have the time to address the change.
9. Employers are also likely to have to pay more so there will also be a hard dollar cost if the implication that the cut in the MTC will be replaced by higher employer subsidies
10. Employers will also have disgruntled employees and that will be a distraction to their job of making widgets.
11. But employers do not vote
12. From the individual’s perspective it is harder to assess. The individual also hates change. The implication is that they lose some MTC and gain more employer subsidies and so may be better off.
13. They may have to pay more themselves but this will be a voluntary decision and they will weigh up the benefits
14. For an individual they still put in a dollar and get more back and so it will always be a good deal – of course perhaps not as good as it was but a good deal
15. From the industries perspective it is interesting. In reality the industry doesn’t care as long as it still has a business. Change allows it to alter what providers do and so it is an opportunity to correct past practices that were less than optimal.
16. It may mean that a few small players exit
17. It probably means that the banks will do another big push and join up another group of people without their full knowledge of what they have done. Banks should not be in wealth and KiwiSaver has allowed them to be in wealth.
18. It gives providers the opportunity to get headlines in the papers. It lets them say that more costs means a longer pay back period.
19. So overall providers will talk about the negativity of constant change and the costs of change but will be saying behind closed doors “this gravy train looks likely to continue for some time and we will continue to make money out of KiwiSaver”
20. The industry, despite what it says, likes change and confusion as that is how it makes money and people become more dependent on it.
21. From the media’s perspective it is simply more headlines, more stories and therefore more content.
22. It is an opportunity for the media to play a leadership role but I doubt that that will happen. What should happen is for someone to take the Herald article that quotes Phil Goll, or take Phill’s press release (I assume he had one) and correct it, challenge his outrageous allocations about the poor people. KiwiSaver was bad for the poor people, Key’s changes will make it less bad but still bad.
23. This should be the role of the media but I suspect it won’t happen
Why dont they just cut the tax rate for anyone under 40...tell them that sorry be no super when you reach 65 ,save your tax cut or your problem, and for those over 40 make a tax reduction on age basis and then as they reach retirement reduce they get there portion (some more than others)...
That way ..you dont save..your problem. It's bascially what they are saying..it's just some of us want to hear it ..some don't
Kiwisaver has never been a good investment.
Not enough people have signed up. 2 1/2 million New Zealanders don't have one. Therefore kiwisavers are a significant minority (of mainly middle-class people) ripe for political persecution by a future left-wing govt representing all those poor people who could never afford to fill out an application form and get free money from the govt.
At some point in the future, once all of the baby-boomers have exhausted the NZ super and we're destitute, means-testing will be introduced. What easier way for a govt to means-test the pension than by looking at your kiwisaver balance? Everyone will have a universal super entitlement minus whatever your kiwisaver (if you have one) provides in retirement.
So it's only worth having a kiwisaver if you believe it will provide an annuity significantly greater than what the pension provides. If your kiwisaver lump sum at age 65 provides an income less than what the pension is, then you might as well not have bothered. The vast majority of kiwisavers will be in this camp I believe.
Kiwisaver would have worked if everyone had been forced to open one. But as that hasn't happened it will become a millstone around the necks of the sensible minority of people who bothered to plan for their retirement.
Treasury originally projected a membership roll of 680,000 --- two years from now in June 2014.
That is the reason govt. contributions to kiwisaver have become unaffordable. Would love to know how the projections could be so far off the mark - is Treasury really that incompetent? How many other govt. decisions are based on unreliable data. One would hope that had he been provided with more reliable data Cullen himself may have seen that it was going to end up unaffordable.
Amanda's assertion that kwisaver was 'wildly more popular than expected'
and carkeek's:
'not enough people have signed up .... kiwisavers are a significant minority (of mainly middle-class people) ..... who could never afford to fill out an application form and get free money from the govt'
Umm in the case of employees ...
Employees are automatically signed into kiwisaver when they join a new company (or were signed in at the outset of the scheme) unless they fill(ed) out a form to opt out of it.
Assume a turnover rate of 20% or most people changing their employers every five years, then in five years time the only employed people not in kiwisaver are those that have conciously asked not to be in.
This not only affects the demographics of the membership, (i.e. it will include people who are not able to think this stuff through) but also goes some way to explaining why it has been so 'popular'
In addition, once you are in, you are in it for good, there is no changing your mind. I think the 'holidays' are a maximum of 5 years, end of story.
For the record, I never subscribed to it as I wanted more control over my investments and did not relish the prospect of being 'trapped' into something with no escape!
It amazes me when people abdicate the responsibility of managing their own money, then whine because they have none left.
My wife and I are savers, we've always been savers, and we spend only what we absolutely have to. As a result we have a nice wee nest egg and no debt of any kind.
We know exactly where our money is going, what it's doing. There are no question marks or fuzzy grey areas.
Savers know just how much a saver can save, and how easy it becomes once you get into the saver's mindset.
Whatever small amount we don't get through not being in Kiwisaver we make up for in spades by having total control over our own finances.
And if we lose any money we only have ourselves to blame, not some anonymous untrustworthy and cretinous "not my money so who cares?" fund manager.
Some of you people are so negative. Almost every set of comments I read on this site, regardless of the article, seems to be dominated by people who have want to rubbish whatever investment strategy the article is promoting/supporting.
For the record, my wife and I are in KiwiSaver. And we have no regrets. It is not our main investment strategy, never was and never will be. But as a small supplement to our mix of other investments it has so far provided exceptional returns. Of the $20,000 we currently have in our KS accounts, substantially less than half was put in by us. From my perspective, even if the government chops out the tax rebate, we will continue to pay the minimum into the accounts and in 12 years time the total return will still have made it well worth it. Is it frustrating that governments can play with the rules and change the game at their will? Yes. But free money is free money and our approach has always been to take it when its on offer, though never to presume it will always remain that way.
I agree Wayne, the scheme for me and everyone I work with is well worth it. Our employer matches our contribution up to 4% which makes the scheme pretty attractive. I've also managed to select a provider who has performed pretty well over the last few years. Even with out the governments $20 a week I still feel I am better off being in the scheme. The question I have is it worth me transferring my Aussie super into my Kiwisaver when that option becomes available. With the FX rates being so good at the moment I think I would jump at the chance.
Does anyone have detail sof the pariliment super scheme for polititians? From what I heard on the radio, the terms are fixed, like what appears to be the case with kiwisaver, where it is a moving target. I heard they get a top up of upto 25% of of their salary a year, and they have no plans to make chages to it.
The old argumenrt was that MPs sacrifice available riches in the private sector to be in public service - so it is only fair that they their wages are supplemented by perks like generous superannuation. I heard details of their scheme last night on the radio. From what I recall, it was quite generous but not ridiculous. It used to be ridiculous - and I expect longer-serving MPs still have it.
So if John Key outlines his relatively humble super, he should be asked what the longer serving MPs are entitled to. I am sure if there was enough of a fuss made about it, John Key will make a gesture by instructing the MP super benefits to be reduced. Or would he? This is fraught with danger, politically. I understand that Tony Blair made a similar sacrificial decision on behalf of MPs and that was the tipping point for many of his parliamentary supporters to rumble against him. After all, Tony is very well off and his wife is a QC i.e. also extremely rich.
Your MPs will support you if you're in power and you're electable, even if you do the most disgraceful things. But muck about with their pay...? Asking for trouble. This makes it no different to any other workplace.
Ha, it's still ridiculous. I doubt many of them could even get a job in the private sector. Either way the public is expected to manage and save their own money why shouldn't MP's be able to do the same. They get paid ok as it is and if they can't manage their own money how can they manage the taxpayers? Cut the perks immediately incl self drive cars etc. Maybe that'll get rid of some of the dead wood out of parliament.
Im not aware you can get it out...however you can take 5 year? holidays and role it for ever.....actually Kiwisaver isnt that bad....just not that good....for me, I'd look at a very conservative fund right now and park it for now, move it to more risky but bigger returns later.....
regards
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