A Beginners Guide To KiwiSaver
What is KiwiSaver and how much do I need to contribute?
KiwiSaver is a long-term investment scheme that the government has put in place to help Kiwis save for retirement. Joining KiwiSaver is voluntary and currently, more than 2.7 million Kiwis belong to the scheme.
You can contribute 3%, 4%, 6%, 8% or 10% of your gross salary or wage each month. If you’re employed and eligible, your employer has to contribute at least three percent of your gross salary into your KiwiSaver account.
On top of this, you may be rewarded a Government Contribution of $521 each year if you save a minimum of around $1043 per year, which equates to about $21 per week. You need to be between the ages of 18 and 64 for this Government Contribution to apply.
What type of fund should I select?
The fund type you select will reflect your circumstances, financial goals and appetite for risk. There are four basic funds as well as a wide array of specialist funds, and you are able to split your contribution across funds for the best outcome.
With this in mind, it may be worth your while to sit down with a financial adviser to work out the best KiwiSaver solution best suited to you.
Also, as KiwiSaver is a long-term plan, the fund(s) you choose to invest in may change over time – so it’s vital to review your KiwiSaver annually and adjust if needed.
What are the costs involved to use KiwiSaver?
KiwiSaver funds are managed by private sector/non-government companies called KiwiSaver providers, such as banks, investment companies and so on. You can choose which KiwiSaver provider to use, but the administrative costs for them to manage your KiwiSaver contributions may vary from company to company.
Financial Markets Authority New Zealand releases a ‘KiwiSaver Tracker’1 on a quarterly basis, which shows you just how much of your fund return you’re paying in fees. This allows you to review the percentage of return that is eaten by fees per provider before selecting your KiwiSaver fund(s).
I want to buy my first home. How can KiwiSaver help me?
KiwiSaver supports first-time home buyers in two ways. Firstly, it allows you to withdraw most of your fund total, which includes your contribution, your employer’s contribution, member tax credits and all interest earned, but you’ll need to leave $1,000 in the account. You also need to contribute for three years before you can withdraw.
Secondly, KiwiSaver gives you access to the HomeStart grant, which could provide you with a maximum sum of $20,000 towards your first home (if it’s a new build and you’re a couple).
KiwiSaver ‘mistakes’ to avoid
1. Staying in the default fund
If you don’t select a fund when signing up to KiwiSaver, you are automatically enrolled for the minimum contribution of three percent in the default fund and the default funds of many KiwiSaver providers are very low return funds. This might not be suitable for you or help to accelerate your retirement savings.
Ask your financial adviser to check if you’re in the default fund. If you are, ask them to recommend the fund(s) best suited to you.
2. Not reviewing your KiwiSaver annually
Is your KiwiSaver aligned to your financial goals? You’re not likely to know if you aren’t checking your KiwiSaver statement.
3. Not qualifying for the member tax credit
The Government Contribution is essentially “free” money to help grow your KiwiSaver. Make sure you’re on track to get the tax credit of $521 by 30 June every year. If you’re below the minimum annual contribution of of $1043, consider topping up your account so that you qualify for the Government Contribution.
What are the risks involved with using KiwiSaver?
KiwiSaver is not guaranteed by the Government, which means you make your investment choices in a KiwiSaver scheme at your own risk. However, KiwiSaver funds were designed to help Kiwis, so it is highly unlikely to lose all of your money in KiwiSaver. However, as an investment fund, it is natural that it will fluctuate in value. Depending on your investment time frame, your financial adviser is best placed to recommend KiwiSaver fund(s) most relevant to you.
What are the benefits of using a financial adviser to manage my KiwiSaver?
No matter how well versed you are on KiwiSaver, having an expert in your corner comes with numerous benefits.
Financial advisers are governed to do the best for the client and can help you structure and manage your KiwiSaver fund. As your financial circumstances change over time, your adviser can help you review your fund annually and adjust the fund contribution or fund type if required.
... as KiwiSaver is a long-term plan, the fund(s) you choose to invest in may change over time – so it’s vital to review your KiwiSaver annually and adjust if needed.
Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular investor’s objectives, financial situation or needs. Any opinions contained in it are held as at the report date and are subject to change without notice. This document is solely for the use of the party to whom it is provided.
I decided when my boys were young that I would teach them both about money and investing. I opened KiwiSaver accounts for them when they were only months old. They also have non-KiwiSaver investment accounts to help fund the cost of university. My wife and I add to the accounts when we can and so do the boy's Grandparents.
Albert Einstein famously said, “compound interest is the eighth wonder of the world, those who understand this, earn it… those that don’t, pay it.” The simple truth of compounding returns is the most important thing that matters for the long-term investor. Yet in today’s world we are consistently bombarded with distractions, become pre-occupied with other things, and we forget this simple truth.