KiwiSaver: Should it be your retirement savings plan?

Monday, 1 April 2019

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

New rules introduced this week mean you have more KiwiSaver options.

As of Monday, you are no longer limited to automatic contribution rates of 3 per cent, 4 per cent or 8 per cent of your pay. You now also have the option of 6 per cent or 10 per cent.

But just because you can save more - should you? And is KiwiSaver the best way to save for retirement?

FOR

It is a truth universally acknowledged that putting money aside for retirement is a *good thing*.

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The earlier you start, the more you will save by 65 - and the more compounding will do the work for you, reducing the proportion that actually has to come out of your pay.

KiwiSaver has some clear advantages over most other schemes.

Your employer has to give you a contribution of at least 3 per cent of your pay if you're in the scheme, and you'll get the member tax credit of $521 if you put in at least $1042 a year.

Should you put aside more money in KiwiSaver each payday?

Fees are generally lower than other managed funds. Economies of scale, and more competition, should push them lower still.

The contributions are managed out of your pay before you see them and then investment decisions are made by a fund manager whose job it is to get you the best return for your risk profile. You do nothing.

If you're looking for a way to save, KiwiSaver is a pretty cheap and efficient way to do it.

Switching to a higher contribution rate will make a big difference.

Aidan Vince, head of KiwiSaver at ASB, said a 30-year-old earning $50,000 who shifted from 3 per cent to 4 per cent contributions would end up with more than 10 per cent extra saved at 65.

Someone who switched to 6 per cent would end up with $24,000 a year in income from KiwiSaver compared to $17,000 at 3 per cent.

Your money is locked away and is hard to access. Unless you're buying a first home or in serious financial hardship, you can't touch it until you are 65, so there's no temptation to dip in.

AGAINST

But hold on, there's been nothing to stop you putting extra, voluntary contributions in to your KiwiSaver account already - and how many people actually do that?

KiwiSaver money is locked away, so allocating too much of your pay to the scheme could be seen to be a bit risky.

Moving to 10 per cent contributions might be intimidating if you know the money is inaccessible for years to come. You could instead continue saving 3 per cent and put the remaining 7 per cent somewhere else.

Why put away more of your money into the scheme than your employer will match? If you have a mortgage, you might be better off diverting any available cash to paying that off. If you have high-interest consumer debt, that should definitely take priority.

The Government has rolled back lots of the original incentives to being in the scheme, anyway. And while employers say they offer 3 per cent contributions, increasingly that's being negotiated as a 'package' so if you aren't in KiwiSaver you end up with 3 per cent more money in our bank account.

It's hard to get as much individual control over your money in KiwiSaver as you'd have if you invested in something such as direct shares or a rental property. Craigs Investment Partners offers a 'select your investments' option - but this isn't common.

VERDICT?

Get some personalised advice on the right thing to do with your money to help you end up better off in the long-term.

Any money or time you can spend now on preparing for retirement should leave you better off post-65.