Stephen France is a KiwiSaver expert and here he has taken the time to explain how it works, what your options are and offers his help if you just need advice…
KiwiSaver was set up in 2007 as a voluntary, long-term work based savings scheme. The money is locked up until NZ retirement age (Currently 65) with a couple of early withdrawal provisions – Serious Financial Hardship, Serious Illness, Permanent Emigration (other than Australia) of First Home Withdrawal.
There is currently about $34b under management and given the size and length of tenure, it is unlikely to be shelved. What is likely is that successive Governments will make changes. What we have seen is that anyone who signed up earlier has been better off than those that join later.
To make sure you receive the maximum benefit from KiwiSaver, there are a few things to consider – The provider, the fund choice, tax rate and contributions.
There are currently over 16 different providers. They range from Banks, Overseas Investment Company’s, Boutique NZ Firms, Churches and Maori Entities. Most members are in a bank scheme with about $22b in ASB, ANZ, BNZ, Westpac and KiwiBank.
If you do not choose your own provider, then you are allocated to one of the nine default providers – ANZ, ASB, Westpac, Fisher Funds, Grosvenor, AMP, BNZ, Mercer and KiwiBank. Your fund go into the “Default Fund”. This is a conservative fund and designed as a holding-place until you decide as to how you want your money invested.
Most funds are diversified funds and in all four of the major asset classes – Cash, Fixed Interest, Shares and Property – Conservative, Balanced or Growth. A conservative fund invests more in Cash and Fixed Interest. These are less volatile investments that are designed to grow your money at a slower rate. A Growth fund invests more in Shares and Commercial Property. You should expect a higher return over the long term, however they are more likely to have periods of no or even negative growth.
There are different methodologies with Investment. Passive funds invest in the whole market. If they invest in NZ Shares, then they invest in all companies in the NZX50. (The top 50 companies). They must invest with the same weightings as the Index – more into Fletcher Building and less into Sky TV. Active managers can invest in any or all the companies, with a view that they can get a better return than the index. Of 50 companies, there would be some companies that you would like to invest in, and other that you would prefer not to – Active Managers have the choice.
There are socially responsible options available. These funds are designed to not invest in companies that produce revenue from Alcohol, Tabaco, Weapons, Fossil Fuels and certain other activities.
KiwiSaver will tax your earnings at either 10.5%, 17.5% or 28%. The tax is based on the lowest of your previous two years’ earnings. If you rate is too high, you cannot claim the overpaid tax back. If you underpay, the IRD can still request the difference. If you do not nominate your tax rate, by joining a default fund, then you will automatically be taxed at 28%.
For employed people, you can contribute 3%, 4% or 8% through your employer, in most cases they will contribute 3%. This will come directly out of your wages. For self-employed people, you can contribute via direct Debit or directly to the IRD. For most people, they should contribute 3%, as long as this equates to $1042 per year, the employer will contribute 3% and the Government will also contribute $521 as a member Tax credit (MTC).
Self-employed people obviously do not receive any employer contributions, so to get the maximum benefits, they should invest $1042 per annum and they will get the $521 MTC. With KiwiSaver being locked in until NZ retirement age, it may be better to look at a non-locked in investment. This will allow for more flexibility.
The returns will differ based on the fund – a conservative fund is more likely to achieve a lower return than a growth fund. A well-managed active fund is likely to have a higher return than a passive fund. The fees for an active fund should be higher, given the additional research and management required. Likewise, a Growth fund should have higher fees than a more Conservative fund. What I am looking for is the most appropriate “nett return” – return less fees.
For you to maximise your KiwiSaver fund you need to;
- Ensure that you choose the most suitable provider
- Invest in a well-managed fund which suits your risk tolerance and goals
- Check that you are not paying any more tax than you need to
- Make sure you receive the maximum Government contribution
At Apex Advice, we are here to help you understand the differences and to find the most suitable fund for you and your risk tolerance. Given that long-term aspects to KiwiSaver, small changes now, could have a big impact on your fund at retirement age. The difference between a Default Fund versus a Growth Fund over a 30-year timeframe could be as much $400,000.
For all your Retirement Planning and KiwiSaver needs, feel free to contact Stephen France on 021 710 301.