Dispelling KiwiSaver misconceptions

Dispelling KiwiSaver misconceptions

Joseph Darby
10 common KiwiSaver myths busted

KiwiSaver is now well entrenched in the New Zealand financial culture. However, there are a multitude of us who still do not fully understand how it works, in many cases this is because of misinformation or changes that have occurred to KiwiSaver since it was first launched.

So it’s time to bust some of the most common KiwiSaver myths. Here’s the top 10 misconceptions about KiwiSaver that just aren’t true.

Myth 1. All funds are the same, it doesn’t matter which one I choose


There are over 270 different funds available managed by various fund managers. Mostly they are highly diversified and can be categorised as Conservative, Moderate, Balanced, Growth, and so on depending on their blend of investments. Different KiwiSaver funds invest in different types of asset classes, with 'riskier' funds that seek a higher return having larger proportions in growth assets such as shares and property when compared to a more conservative fund.

There are niche funds available too – such as those which only invest in global listed property, Australasian shares, Australasian property, disruptive technologies, and so on.

There is a KiwiSaver fund for everyone.

Myth 2. Low fees are the most important thing

Partly busted:

There’s a lot of talk about fees, especially in the mainstream media.

But fees are just one part of the overall package. What counts most is the returns adjusted for the investment risk taken: the performance figures – after fees and taxes have been taken out. In other words, this is about results, though the catch is that we only know results after they’ve been achieved, and past performance doesn’t guarantee future returns!

According to the latest KiwiSaver data collated by Morningstar, after all fees are deducted:

  • The best performing Aggressive scheme over 10, 5, and 3 years had above average fees for the category.
  • The best performing Growth schemes over 10, 5, and 3 years also had above average fees for the category.
  • The best performing Balanced scheme over 10, 5, and 3 years also had above average fees for the category.
  • The best performing Moderate schemes over 10, 5, and 3 years also had above average fees for the category.

Do you notice a pattern here? The lowest fees have not always obtained the best results over mid-to long-term timeframes, noting KiwiSaver is a long-term investment vehicle. Admittedly, there are a few KiwiSaver providers that aren’t doing enough for the fees they charge, but the results above highlight that we can’t just all “race to the bottom” and pick the cheapest option without taking a broader look at what we’re getting for our fees. Would you just go for the cheapest option when buying a car, house, or anything else and expect to get a decent result?

Myth 3. I’m too young for it to matter – KiwiSaver is just for older people


Even if you’re not remotely close to retirement age, starting your contributions early can make a big difference later on. You can use KiwiSaver money to help with your first home deposit, or keep it accumulating to help fund your retirement. The more money you put in now, the better your chance of having more later in life.

In fact, the more years there are between now and you making a withdrawal, the more investment risk you can probably accept.

Myth 4. It’s like a savings account. My KiwiSaver Scheme investment value should always go up, never down

Partly busted:

As part of it’s name suggests, KiwiSaver is a type of savings scheme, but it is really an investment. This means that you could make money, also known as investment returns, off the money you have in your account. KiwiSaver is a bit different to a regular savings account though, you can’t take out the money when you want.

The only real ways to withdraw money is for a first-home deposit, or when you turn 65 for your retirement. You also might be able to take your money out if you’re seriously ill or suffering financial hardship, but it’s hard to do. There are a couple of other ways to withdraw too, such as moving overseas permanently, but these are uncommon.

The Covid-19 driven market downturn in early/mid 2020 has helped dispel this myth of KiwiSaver returns always going up.

Myth 5. When I die, the government gets it


Quite a few people think that when you die, the government, or maybe your employer, gets your money. This isn’t true. When you die, KiwiSaver proceeds become part of your estate along with any other assets you have.

The best way to ensure a KiwiSaver Scheme investment goes to who you want it to when you die is to include it in your will.

Myth 6. I could lose all my savings if the scheme provider goes bankrupt


The assets within KiwiSaver schemes are held in bare trust for all investors, entirely separate from the provider. Your money is safe, as the providers simply give instructions to manage your money, they do not own the assets themselves. If a KiwiSaver provider were to go into bankruptcy, your money in KiwiSaver would be protected as it cannot be used to cover their debts.

Myth 7. KiwiSaver is all I need


Perhaps the biggest issue with KiwiSaver is that many New Zealanders think that because they’re a KiwiSaver member they’ll have a sufficient nest egg for retirement. For most people, this couldn’t be further from the truth, as the average KiwiSaver balance is a little over $20,000. Even then, some of the restrictions around KiwiSaver mean it should only ever be just one component of an overall wealth creation strategy.

This includes other investments which can be more easily accessed if the need arises – such as to retire or make a major purchase before age 65 – and aren’t subject to government tinkering.

Myth 8. KiwiSaver is only for employees

Partly busted:

You do not need to be employed to contribute to KiwiSaver. While non-employees won't be getting the employer contribution, they can still get the government contribution (formerly known as the ‘Member Tax Credit’) which is essentially free money. Some people think of the government contribution as getting some of their taxes back, though you don’t even have to pay tax – in any form – to get it.

If you’re self-employed, a stay-at-home parent, or even if you’ve retired early then putting as little as $20 per week into a KiwiSaver account would get you $520 of government contributions annually – with only $1040 of your own savings.

You might be surprised to know that only 59% of us make contributions to KiwiSaver. The other 41% are probably missing out on free money.

Myth 9. Conservative funds are safer


Unless you choose not to be, you will usually be placed in a low-risk default fund when you first sign up to KiwiSaver, though this approach is changing over coming months.

This sort of low risk / low return fund won’t be the most suitable fund for everyone. If you are someone who is investing for the long-term, maybe you can ride out the volatility in the market by investing in a ‘riskier’ fund which is expected to give you higher returns, such as a Growth or even Aggressive fund. It is important to be in the right type of fund as you could be missing out on significant returns by staying in a more low-risk fund.

In a strange way, the perceived safety of Conservative funds is actually a little backward. The risk with these sort of funds is that they might struggle to beat long-term inflation rates, so the ‘safety’ could mean that investors are actually losing money in real terms – the exact opposite of safe!

Myth 10. If my KiwiSaver balance drops, I should switch to a lower risk fund and/or stop contributing


Stopping your contributions could actually cost you a lot of money in the future, though of course this does depend on your situation. Fluctuations are a natural part of investing, especially if you are investing in a more high-risk KiwiSaver fund. Switching to a more low-risk fund to avoid further losses is a common mistake as when the market recovers, you will nearly certainly miss out on the higher returns. This is called trying to time the market, and even some of the brightest people in the world who have built careers as fulltime investment professionals can’t reliably do this.

KiwiSaver is a long-term investment scheme. Just because the current returns might be low or even negative, it does not mean that you should stop contributing. When returns are negative, you are only experiencing real losses from your investments when you withdraw your money over that time. To obtain higher returns in the future keeping up contributions when things dip is the way to build true KiwiSaver wealth.

The bottom line, KiwiSaver myths busted

When it comes to investing, knowledge is power – so keep building your knowledge base and you’ll be on the way to a whopper KiwiSaver balance which can make your future life a lot more comfortable and enjoyable.

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