KiwiSaver for kids: Here's what you need to know

Friday, 1 February 2019

You want the best for your kids' futures - how does Kiwisaver fit into that?

If you've had a child recently, you've probably spent a lot of time wondering what their future will look like.

How will they afford a house? Will they end up with a huge student loan?

Many parents try to give their children a financial head start by setting up savings and investments from early in their lives.

Many choose to do so with retirement savings scheme KiwiSaver: There were 8456 members aged 17 and under in the most recent financial year.

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But now the $1000 kickstart is no longer available, is it still a good option? We look at the pros and cons.

FOR

Because KiwiSaver fees are largely charged as a percentage of a saver's balance, they rise every year.

KiwiSaver is a long-term saving scheme, and the longer you are in it, the better.

If you start early, you can amass significant savings, even if you only contribute a small amount each week.

Someone who started in KiwiSaver at birth and contributed $10 a week until age 65 would amass $136,306 to spend in retirement - and that calculation does not include any of the contributions that person would make from their earnings through their working lives.

If they started work at 18, earning $45,000 and contributing 3 per cent plus their employer's 3 per cent, they should end up with more than $380,000.

Opening a KiwiSaver account is much more accessible to the average new parent than starting an investment in a managed fund.

There is no minimum investment required and the fees are generally lower than you'd be charged for a similar investment outside the scheme. In fact, you may be able to find a fee-free option, such as Juno's and Craigs Investment Partner's.

NZ Funds also waives the fee for those who contribute $200 or more a year and Aon offers a fee reduction. Simplicity does not charge the fixed fee component.

If you are confident that your kids will want to use the money for a first home, it's a good way to help them to their goal. Once they start working and turn 18, they'll get employer contributions and the government contribution of up to $520 a year.

People under 18 are not required to make payments unless they are employed.

Joining KiwiSaver young removes the likelihood that your child may drag their feet about it later on.

AGAINST

Until 2015, a key reason that many parents signed their children up was the $1000 kickstart that new members received from the government.

This is no longer available.

That's had an impact on the number of kids being signed up - between 2017 and 2018 the proportion of members under 17 dropped from 12.2 per cent to 11.1 per cent.

There is no member tax credit from the government for people aged under 18. Once a young KiwiSaver member starts work, even as a part-time job, contributions will be taken from their pay, unless they opt for a contributions holiday. But their employer will not be obliged to match it until they turn 18.

If they are not in a low or fees-free account, it's possible that fees could erode their balance over time, especially if they do not have a lot in the account.

Schemes charge a fixed annual fee, usually between $25 and $40 no matter how big the account, and then a percentage fee based on the amount of money invested. If you had $1000 invested, you'd need a return of at least 5 per cent a year to cover an annual fee of $50.

The biggest problem may be that the money is locked in for retirement or until the purchase of a first home. That could be an issue if your child is facing a big bill for something else, such as university.