Kiwisaver is not rigged

I constantly hear people bashing Kiwisaver. Not helped by articles like this, that feed into the hype.

 

9 Common objections to Kiwisaver

 

1/. I can’t get my money out until I turn 65.

That is the whole point! Not to touch our money until we retire. If we need some money before retirement then lucky for us there are options on how much we want to contribute. We can contribute just 3% of our income if we are worried about too much being ‘locked away’.

 

2/. My employer contribution is just a way for my employer to pay me less

Maybe your employer would pay you more if they didn’t have to contribute to Kiwisaver, or maybe they wouldn’t. Either way, we can’t change that. We must play the game. If we choose not to invest because of this reason, we will miss out on employer contributions to Kiwisaver whilst still being on the same pay as our Kiwisaver enrolled co-worker.

Even if your employer would pay you the same whether or not they were providing Kiwisaver contributions, you are still missing out on a 50% return on up to $1043 via the member tax credit. 

 

3/. Kiwisaver fees are too high

Whose fault is that? We now have a plethora of options to choose from, ranging from the high to the low fee funds. If you have $10,000 in Kiwisaver, a company like Simplicity would charge just 0.6% in fees. An investment of $100,000 would just incur 0.33% in fees. You just need to do your research to find the companies that offer the lowest fees if that is your main concern.

 

4/. My returns are not very high

You are most likely in a conservative or a default fund. Like any investment, the more risk you take, the higher your returns will likely be. Because Kiwisaver is a long-term investment for those under the age of 50, investing in a growth fund with some risk would be required if you are looking for larger returns and can tolerate the ups and downs of the market.

 

5/. The government tax credit is just my money anyway

This is actually false. The tax we pay is government money to be used as they see fit. It is not our money. We are taxed on our gross pay. We contribute a percentage of our before tax pay to Kiwisaver. Our employer contributes a percentage of our after-tax pay to our Kiwisaver. Our tax payment does not change whether we are in Kiwisaver or not. This means that those in Kiwisaver ARE NOT paying more in tax than those not in Kiwisaver.

Therefore, the government tax credit we receive is FREE money that non-kiwisaver members do not get. We would not get this money back if we weren’t in Kiwisaver. Unless of course you are under 18 or over 65. You won’t receive your tax credit then.

The taxes of people not in Kiwisaver are actually contributing to the tax credits of people in Kiwisaver. Paying for it but not getting any of the benefit. Why let only others benefit from your tax payments? We should get in on that.

 

6/. I can’t trust the government with my money

I hear this objection a lot. Three things here. It is not actually the government that manages your Kiwisaver money. It is a fund manager. Secondly, you get to choose who manages your money. If you are not happy with your provider, or you do not trust them, find someone you do trust. There are plenty of options out there. Thirdly, if your fund managers business goes under, your money will be ok, assuming there is still value in your account. It is held in a separate trust that can be transferred to another company. 

 

7/. The government might remove the incentives

Maybe, maybe not. If we always fear the worst in life we will never get anything done though. We can only deal with what is in front of us. Besides, it is in the governments best interests for us to save for our own retirements, making it unlikely for them to remove all incentives.

 

8/. I can get better returns elsewhere

Maybe you would rather pay down your mortgage, invest in a rental property, or choose your own investment thinking you will get better returns. But are you comparing apples with apples? An 8% return on your investment vs a 6% return in a Kiwisaver fund may not be the same. For example, if you invest $2,000 in a year into both investments (3% contribution), you would see a $160 return to your own investment and $120 to an equivalent Kiwisaver investment.

We can’t forget though, with Kiwisaver we have the added benefits of both the employer and government contributions. In this case $1500 from the employer and $521 from the government for a total return of $2,141 ($1500 + $521 + $120). Blows the $160 return from our other investment out of the water. In this case we have invested $2,000 of our own money for a return of $2,141. This is a 107% return – well over double our money. Even if our Kiwisaver fund returned no money we would still receive a guaranteed return of $2,021 or 101%. Double our money. Where can this be beat?

If you can somehow get cash payments from your employer instead of Kiwisaver contributions then that may take away some of the advantage of Kiwisaver, but the reality for many is that our employers won’t replace our Kiwisaver with higher incomes. If you are one of the lucky ones to receive this then you must invest all the extra cash to make it worthwhile. Otherwise, Kiwisaver wins hands down. Employer and government contributions are guaranteed. Investment returns are not.

 

9/. Kiwisaver is rigged

I have heard the argument that only the government and fund managers benefit from us being in Kiwisaver. The government because it locks us to staying in the country and fund managers because they charge fees. They say the system is rigged. This is of course a massive over-reaction and not at all good justification to not invest in Kiwisaver.

As explained earlier, fund managers do charge fees, but they can vary from low to high. They are providing a service and must be paid. Some may be charging too high in some people’s opinions, but guess what? You don’t have to use them if you don’t want. It is far from rigged. Rigged would be if you didn’t have any other options to use anyone else to manage your investment. The system is far from rigged and we benefit immensely from investing in Kiwisaver on our terms.

 

Final Thoughts

Kiwisaver is a great investment for the majority of New Zealanders. There are several arguments explored today as to why Kiwisaver is apparently no good, but most of the arguments can easily be countered. The positives far outweigh any negatives, and most will be hard pressed to find a better use for your money. If you are not in Kiwisaver, you are literally leaving free money on the table.

YOU can decide how much to contribute. YOU can decide what type of fund to invest in. YOU can decide what fund management company to use. YOU can decide how much fees to pay. Don’t rely on misinformation that fees are too high, or fund managers are corrupt. You have options. Research what is best for you, instead of sticking with the unsuitable.

The key is to take an interest in your Kiwisaver investments. Instead of relying on your company automatically enrolling you in the default fund. Make your own choices. Ones that more closely resemble your risk levels, goals and values. You will feel much better for it, and so will your wallet.

***** Kiwisaver update as at 1 April 2019. the Taxation Bill will introduce some key law changes including:

* The possibility for people over 65 to join KiwiSaver; 
* The removal of the lock-in period that required people over 60 who just joined the scheme to wait for five years before withdrawing their money; 
* The introduction of new contribution rates of 6% and 10%;
* The name change from "contribution holiday" to "savings suspension", and its reduction from a maximum of five years to one year.

Check to see how this may affect your plans *****

 

 

The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here

 

What is your Kiwisaver experience? Is there anyone that isn’t invested in Kiwisaver? Why or why not?  Comment below