What has changed with KiwiSaver?

Though most changes are minor, many of you could be impacted by the latest modifications to KiwiSaver

A major drawback of KiwiSaver is the fiddling and tinkering to it which has occurred since it began. This is often politically motivated, though fortunately, most of this years’ changes seem to be minor improvements. Read on to learn more.

Did you know:

• More than 2.9 million of us are invested in a KiwiSaver Scheme?
• Over 1.2 million members of KiwiSaver make zero contributions?
• Approximately 37% of members are in either cash, default, or conservative fund choices? (Chances are, most of these people have no need to be in such funds and would be better-off elsewhere).

Source for above: FMA annual KiwiSaver report

Plenty of features of KiwiSaver make it a “no brainer”, even if membership is voluntary. Subject to criteria, the major drawcards of membership include:

• Annual government contribution of up to $521 per year,
• If employed, regular contributions from your employer,
• Its “set and forget” nature means it’s simple to be an investor. For example, if you are employed, your contributions come out of your pay before you see them (which also helps you invest by dollar-cost averaging), and
• Many members are also eligible for additional funding in the form of the first home grant toward the deposit on their first home.

Despite the advantages explained above, KiwiSaver has a few significant drawbacks. These drawbacks mean KiwiSaver falls well short of providing a total investment solution for most members. For instance:

• Inflexibility. Strict withdrawal criteria mean that your KiwiSaver investment will generally be inaccessible until: you're eligible for NZ Superannuation (the ‘pension’), or you buy your first home, or a limited range of other criteria are met,
• You can only be a member of one scheme at a time, and you can’t choose your own specific investments,
• Complacency – many people think making minimum payments to KiwiSaver is enough to fund their later years, chances are these people are mistaken,
• The steady stream of meddling which has occurred with KiwiSaver since it began over a decade ago, and which continue to take place. Admittedly, many of the changes are positive, though some (of course!) may not be so beneficial for all of us.

Here are some of the 2020 changes to KiwiSaver, with accompanying general comments based on what we think of each change:

KiwiSaver changes, which already took place, on 1 April 2020

Change 1: retirement withdrawal criteria

All members aged 65 years or over can make a retirement withdrawal, regardless of how long they’ve been a member.

Our two cents (what our advisers think): A good change, which means members over 60 who join no longer have to wait for five years before they can withdraw their funds.

Change 2: tax details from IRD

KiwiSaver providers will be notified of prescribed investor rate (PIR) changes from the Inland Revenue Department (IRD). The PIR is the method and rate of tax on KiwiSaver investments.

Our two cents: This is an overdue improvement which should avoid the issue identified in 2019 – when IRD had to send a million letters to KiwiSaver members who were on the wrong tax rate!

Change 3: transferring to a new provider

Transfer timeframes between different schemes reduced from six weeks to two weeks.

Our two cents: This is another positive change, as some providers could take a long time to get around to this. These delays often led to confusion among those who had just changed between different KiwiSaver providers.

Change 4: retirement withdrawal criteria

A new early withdrawal category has been established for members who are diagnosed with life-shortening congenital conditions.

Our two cents: This is an improvement, though it is also long overdue.

KiwiSaver changes that take effect on 15 May 2020:

Change 5: statements will show retirement calculations

Member annual account statements will include an estimate of what a member’s KiwiSaver balance might be at retirement, both as a lump sum and as a weekly income stream.

Our two cents: This is an interesting area. On the one hand, anything that might get people thinking about how much personal funding they might have for retirement is a good thing, however, this could also be an area of significant confusion.

Forecasting ahead to retirement is a challenge at the best of times, because to make calculations about the distant future you first need to make assumptions, (sometimes not much more than guesses!), about the inputs into the calculations. A slight difference in input can be exaggerated over many years and will lead to massive differences in output – in this case the numbers you will be shown on your KiwiSaver statement. While the calculations providers use have been standardised and improved since we last explained the six reasons you can’t trust retirement income calculators, this still has potential to be a dicey area. For example, for a 30-year-old KiwiSaver member, the answers to the following basic questions will have a huge impact on retirement income, and there’s no way to include them in the KiwiSaver statements:

1. How much do you expect to receive in regular or one-off pay rises between now and retirement?
2. What age will you be when you retire?
3. How long will you live?
4. What government assistance will be available in your retirement? (e.g. most people think that NZ Superannuation, commonly called “the pension”, can’t be sustained in its current format, so won’t be around for much longer).

Of course, the answers to some of the questions above are unknowable!

Are more KiwiSaver changes likely?

More changes have already been signalled, including regarding responsible investing and the desired asset allocation (mix of investments) for default funds. Watch this space for more updates…

What next?

Depending on your individual situation, it might be best to only invest a small regular sum into KiwiSaver so you can make the most of the benefits the scheme offers. For most employees, this means a three percent contribution rate paid through salary, matched by an employer contribution.

After this regular payment is set up, it’s a wise move to assess what to do with any other regular surplus funds you might have – if you invest any more in KiwiSaver you may unnecessarily lock those funds up for many years.

You might like to book in to discuss with us things like:

• Your existing KiwiSaver investment, and/or
• Alternatives to investing any more than the minimum into KiwiSaver.

Either way, it would be our pleasure to assist.

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