Are there any downsides to KiwiSaver? Don’t get me wrong- I do believe that KiwiSaver has its place, and if you are a salary earner you should be enrolled and contributing. It’ll be the best return on an investment you will ever get!
I’ve already done a post about what I think is wrong with Kiwisaver. That points out the downsides of KiwiSaver in terms of total remuneration, tax credits, contribution holidays, and the default schemes. These are all area where improvements could be made, and in fact, they have already addressed the tax credit and contribution holiday issues.
So here are 5 downsides to KiwiSaver.
1. Rigid Structure
Kiwisaver isn’t a traditional savings account. It’s locked in a retirement investing account managed by your KiwiSaver scheme provider. Currently, around 2.84 million kiwis are KiwiSaver members, even though it’s a voluntary scheme.
Kiwisaver is arguably quite rigid in its structure and doesn’t take into account people’s varying financial situations, and whether a higher Kiwisaver contribution rate is the best form of saving for their individual needs. For some, the best choice might be repaying a mortgage, investing in a business, or a farm, or perhaps acquiring financial assets.
You could say that increasing the range of contribution rates from 3%, 4%, 8% to 3%, 4%, 6%, 8% and 10% makes the schemer less rigid, and it does to some degree, but there are many other aspects of KiwiSaver that are rigid.
It also detracts from other forms of investments which might be better forms of retirement saving for an individual. That leads me on to my second point.
2. A False Sense of Security
Kiwisaver can give a false sense of security for many people. Kiwisaver is often touted as the answer to your retirement savings needs.
Kiwisaver undoubtedly offers people an effective, easy method of savings for retirement which can’t be touched until you retire, but only relying on your KiwiSaver for retirement isn’t going to work. It’s simply not enough.
Your KiwiSaver should not be used as a substitute for other forms of personal savings. Internationally, the recommendation is to save at least 10% for your retirement, and often 15% or more is recommended. If you are only contributing 3% into Kiwisaver, then your savings rate is around 6%, taking into account your employers contribution and government credits. That’s not high enough.
You could say that the answer to this is to contribute more into KiwiSaver to bring your retirement savings rate up to the recommended level. After all, there are tax advantages to contributing a higher amount right?
3. But, There are Tax Advantages to Contributing a Higher Amount Right?
First off, KiwiSaver is deducted from your post-tax earnings, so there is no tax advantage there, regardless of the amount you are contributing. And there are no extra tax benefits from increasing your contribution rate above 3%. At 3% you have maxed out the government bonus and employer contributions.
Government contributions are a one-off payment per year, so only the first $1042 is really worthwhile, and even then, that amount is limited by the age of the KiwiSaver account and age of the person. Under 18, no government bonus, over 65- no government bonus.
So there are no more benefits in KiwiSaver compared to any other PIE investment fund that I can think of. And if there are, please let me know.
I for one won’t be contributing a cent more than any employer-matched amount – but then again, I’m one of the lucky ones who get a genuine matched amount that isn’t skimmed off the top of my remuneration. Read more about the total remuneration issue here.
4. But I’ll Have NZ Super to Help
Here’s the word straight from the horse’s mouth: “We can confirm that NZ Super is paid from current taxes,” says a Treasury spokesperson. There’s no fund providing input at this stage.
So NZ super is basically paid by the current working class through taxes. And as the working class shrinks and the retirement class grows, the amount of NZ super a retired person will receive will shrink over time. The spokesperson also adds, though, “At some point in the years to come, the New Zealand Superannuation Fund will also help pay some of the future cost of providing superannuation.”
He’s referring to the big pool of money, around $30 billion, which is sometimes called the Cullen Fund. The government contributed to this fund from 2003 to 2009 and is scheduled to contribute again from 2020/21. From about 2031/32, withdrawals from the fund are expected to contribute towards baby boomers’ NZ Super.
On your question about KiwiSaver, it’s quite separate from NZ Super. Neither is means-tested, although it’s always possible that a future government will decide to means test NZ Super. That could result in those with KiwiSaver — or any other retirement savings — receiving less. But I’m sure the government would set it up, so those people are still better off, in total than people with no savings.
The government could even go further than means-testing NZ super. They could move the goal post to 67, or even 70 years. All I’m trying to point out is that NZ super will probably not be the same as it is today when you retire.
5. A lack of Education
Compulsory KiwiSaver is important. Generally, kiwis aren’t good savers. KiwiSaver helps with this. The problem is that there is a lack of education associated with KiwiSaver.
How many people are still in the default KiwiSaver fund? Around 770,000, or 27% if you count employer nominated funds.
Have 27% of KiwiSaver members reviewed all the fund options and decided that the default fund is the best.
And what happens when they turn 65? They will get a large lump of cash. And what do people do with large lumps of cash? They spend it. Why wouldn’t they? At no time in their life have they had to manage a large lump of cash. They wouldn’t know what to do with it. How do you make this lump of cash last for 20 years or more in retirement?
Recent Changes To KiwiSaver
A while ago there was a proposal to introduce capital gains tax. Everyone was talking about it and what it would mean. While there was a lot of focus on capital gains tax on housing, there was also a capital gains tax that could have been imposed on KiwiSaver and shares.
I’m glad that capital gains tax on KiwiSaver is off the table now. But there have been other changes to KiwiSaver in April that may have gone unnoticed. From the 1st of April those changes are;
- There are two new contribution rates added to KiwiSaver, giving you more options in how much you contribute to your savings. The new contribution rates are 6% and 10% – that means there are now 3%, 4%, 6%, 8% and 10% options to consider. But remember that your employer will only match 3%.
- The ‘Contribution Holiday’ – where you can elect to stop contributing to your KiwiSaver account for a period of time, has been renamed to a ‘Savings suspension’. The suspension will now also have a maximum period of one year before you will need to renew it.
- They’re also renaming the ‘Member Tax Credit (MTC)’ to ‘Government Contribution’. Because the Members tax credit didn’t really have anything to do with tax at all.
KiwiSaver is probably the best scheme we have at the moment to assist ordinary kiwis to prepare for retirement. However, there are some real downsides to the system that are often overlooked. Including a false sense of security and a lack of financial education.
Either way, I suggest you still become a member if your employer is truly matching your contributions, otherwise you are really leaving money on the table. All I ask is that you take some time to look into what fund you are in, and do some basic calculations on how much you need for your retirement. And possibly start a personal investment account outside Kiwisaver.