Are You Investing Too Much into KiwiSaver?

Are You Investing Too Much into KiwiSaver?

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With over three million members, KiwiSaver is New Zealand's flagship retirement savings scheme. It has gathered plenty of attention for its merits: but while the scheme offers enticing benefits, a closer look reveals potential drawbacks that investors should carefully think over.

Here we delve into the main drawbacks surrounding KiwiSaver and explore how investors can strike a balance between maximising its advantages and mitigating its shortcomings.

1. The Main KiwiSaver Investor Mistake: Over-Investment

KiwiSaver’s merits are well-documented, like the employer contribution for employees, the government contribution of $521 per year (like a tax refund), ease of regular investment via payroll, and more.

But, nearly all experts caution against allocating more than the minimum into KiwiSaver. While many KiwiSaver investors are overly focussed on fund performance or fees, they overlook the overinvestment issue.


Because once you’ve qualified for the government contribution, you might be better off investing that money in other avenues with greater accessibility and flexibility. Read on to learn more.

2. KiwiSaver Funds: Flexibility Lacking

The assets most KiwiSaver schemes invest into (including stocks/shares and bonds), are characterised by their high liquidity, that is, the ease of being converted into cash. Think of it this way: if you hold shares yourself and need some extra funding, you can simply sell them.

But the law stipulates access to KiwiSaver funds is restricted until retirement age, currently 65, with very limited other exemptions available, most notably for first home purchases or severe financial hardship. While these rules are designed to safeguard retirement funds, they inadvertently limit investors' flexibility and hinder the possibility of early retirement or funding any other number of valid pursuits such as buying or starting a business, travelling, buying a car, pursuing your hobbies or education. In other words, the restriction on accessing KiwiSaver funds until age 65 might not align with individuals' life trajectories. This raises valid questions about how to align individual financial goals within the scheme's constraints.

Financial goals can vary widely; we are all unique, after all! The inability to tap into your money to support life events or opportunities is critical – there’s no point in having wealth if you can’t use it.

Alternatively, if you don’t trust yourself and your own self-discipline, then locking away your money for decades is probably a great idea. Housing and retirement are nearly always viewed as worthwhile things to save or invest towards.

3. Limited Compensation for Illiquidity

In the financial world, whenever an investor lacks easy access to their investment (termed “illiquidity”), generally, the investor is compensated for it with some financial benefit. For example:

Term Deposits

Lock your money in for a fixed period, but usually offer higher interest rates than an on-call savings account.

Commercial Properties

These are usually not as easy to sell as a residential property, so we would say they’re less liquid. That’s one reason commercial properties typically provide a higher rent (“yield”) than residential property.

Private Companies

Unlike major companies traded on stock exchanges like the NZX, private companies are usually far harder to buy and sell. Therefore, they are generally much less expensive than their publicly traded counterparts. Private companies include nearly all small- and mid-sized businesses in New Zealand.


To illustrate this point further: even fixed-term mortgages come with better rates than a more flexible floating-rate home loan. This compensates for the fact that the borrower can’t easily repay some or all the loan at any time, enjoy the benefits of an offset account, and so on.

With KiwiSaver, the compensation for illiquidity is $521 per year government contribution and employer contributions if you’re an employee.

4. Changing Governments and Changing KiwiSaver

The government does not hold the money you invest into a KiwiSaver fund, but the government still controls the rules around when you can access the capital and certain other things fund managers must do.

The KiwiSaver Act is visible online. Since KiwiSaver’s launch in 2006 it has been often tinkered with by different governments. Many of these changes are not significant, but many are. KiwiSaver is so well-known that it’s become something of a political football to be kicked around. Just recently, we all narrowly avoided another tax that would have impacted our individual KiwiSaver balances. Suppose you’ve got 30 or 40 years to go until retirement. In that case, there will be many governments between now and then. And, as the KiwiSaver pot (the total of all KiwiSaver investments) grows, it’s reasonable to expect even more tinkering and, possibly, more taxes.

It's essential to recognise these limitations and complement KiwiSaver with investments that leave less control in the hands of politicians.

5. Complementing KiwiSaver: Building a Robust Financial Strategy

While making the minimum KiwiSaver contribution is usually prudent, experts suggest supplementing it with other investments that offer enhanced accessibility. Plenty of managed investments are available that look like KiwiSaver and have fees and taxes like KiwiSaver but have nothing to do with your employer or the government: you can access them whenever you please. Alternatively, you might directly invest yourself. The most common choices include:

  • Real estate (property investment)
  • Shares
  • Your own business or side hustle
  • Or something else

Of course, long-term investments should not be treated like an emergency stash to be raided whenever you see fit. However, these investments generally offer you one thing KiwiSaver cannot: flexibility.

Diversification is one of the fundamental principles of investing, so diversifying investments beyond KiwiSaver makes perfect sense. If you don’t know where to start, book a consultation, as we can help craft an overall strategy that aligns with your situation, risk tolerance and goals.

6. KiwiSaver Can’t Be Borrowed Against

Borrowing to invest is called leveraged investing.

Leveraged investing is common for many of us: borrowing money from the bank to buy a first home can be considered a form of leveraged investing. Property investors borrow to buy more properties, and small businesses borrow money to buy more stock to sell, more tools, more utes, or nearly anything else they might need. Big businesses are nearly always borrowers. You can even borrow money from some banks to invest in shares.

Leverage increases risk and increases potential returns.

KiwiSaver cannot be used as security to borrow against. This is unlike many overseas equivalent retirement savings schemes, for example, the 401(k) in the United States, which can be used as security for a loan. Here in New Zealand, we’re not so fortunate.  

The Bottom Line: KiwiSaver Is Fantastic up Until a Point

KiwiSaver's benefits are compelling, but it comes with limitations which many of us overlook.

Good investing is often about taking a step back and considering the big picture. In this case, that means combining KiwiSaver’s advantages with non-KiwiSaver investments to ensure maximum accessibility, flexibility, and control over your money and your life.

It’d be the pleasure of one of our trained professionals to help you work through any of the topics mentioned above, so get in touch today.

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