KiwiSaver, How a Dollar Saved is More than a Dollar Earned
KiwiSaver is a New Zealand government based saving scheme which New Zealanders can voluntarily sign up to so that they can save for retirement or their first home. Originally being introduced, July 2007, KiwiSaver now has grown to have well over 2.5 million New Zealanders as members and also around $5.5 billion worth of contributions by scheme providers.
KiwiSaver works as a managed trust fund where you to choose to make contributions of 3%, 4% or 8% of your gross (before tax) income. This contribution is supported by at least a 3% contribution by your employer and a further contribution by the government of $0.50 for every dollar you contribute (maximum of $521 per year.) This managed fund is invested for you by KiwiSaver under the guidance of financial experts into a portfolio of different investment options. This diversification of investments is done so that risk is minimised and so that you receive the desired return on investment from your selected scheme. This risk and return on investment differ between providers and also the KiwiSaver scheme you have chosen, but we will touch on that shortly.
A KiwiSaver account has pretty much become the most common savings account for New Zealanders as it has helped millions of kiwis to date with purchasing their first homes or for saving for their retirement. Simple to set up and low in fees, a KiwiSaver account often becomes money you forget about as deductions are made before you receive your wages/salary. It’s kind of like when you put money into a piggy bank as a kid and forget about it for five or so years and then accidentally re-discover it and think to yourself, “well this is neat.” Yes, a KiwiSaver can be like one of those experiences, except with this one you earn interest and free money too!
Since here at NZCU South we are advocates for the KiwiSaver scheme, we thought we should share with our members, some more information on the scheme. Keep in mind that there are multiple providers who offer KiwiSaver initiatives, we suggest you take this information and then do some research. So that you can see whether you are getting the most out of your contributions.
What are the Different Types of Accounts?
Earlier we mentioned there were multiple providers and KiwiSaver schemes available for New Zealanders to invest with. In order to keep things simple, we will stick to the three common types of accounts that are available; conservative, balanced and growth funds.
Conservative Fund: Is mainly made up of bank deposits and other fixed interest investments. Offering both a lower risk and lower return on investment, a conservative fund is less volatile meaning it is great for saving for a first home or new vehicle if the time horizon is small, like under three years.
Balanced Fund: Is of medium risk and reward as it is made up of an equal split between fixed interest investments and deposits, as well as higher risk growth assets such as property and shares. It’s for more medium-term investing and is suitable for you if you don’t mind riding through the ups and downs for a slightly higher average long-term return, compared to a conservative fund.
Growth Fund: A growth fund is for those who are not afraid of the risk of losing money and who are aiming for high returns over an extended period. Being mainly made up of shares and property, a growth fund is ideal for long-term investing (like retirement) while you don’t currently have much money invested and can afford the risk.
What Can I use a KiwiSaver for?
New Zealanders mainly use their KiwiSaver accounts for two things, buying a first home or saving for retirement. Since the account is a managed fund, there are rather strict regulations set in place to prevent you from withdrawing from it regularly. Although you can apply for financial hardship in order to make a withdraw, a KiwiSaver account is generally inaccessible until you reach the age of 65 years or you can show proof of a deposit on a first home.
Buying First Home: Many New Zealanders use their KiwiSaver account to purchase their first home as this is one of the initiatives that gets promoted with the scheme. KiwiSaver changed their policy back in 2015 and made it possible for those New Zealanders who have made contributions for at least three years, to use their savings for the initial deposit of their first home. You used to be only able to use your KiwiSaver to help pay off a portion of the mortgage after your initial deposit. But due to the increasing difficulties in the housing market, KiwiSaver removed this restriction.
Along with having government contributions each year, (potentially up to $521 p.a.) KiwiSaver also offers a HomeStart grant for first time home buyers if they have been regularly contributing for at least three years. The grant gives the home buyer $1,000 for each year of contribution;
- Three years of contributing = $3,000 (the minimum you can get)
- Four years of contributing = $4,000
- Five years of contributing = $5,000 (the maximum you can get).
$1,000 is given each year if the house is an existing or older home. However, this contribution is doubled if the grant is for a new home (i.e. the plans for one or the land.)
You can find out more information about purchasing a home with your KiwiSaver or applying for a HomeStart grant online at www.hnzc.co.nz.
Retirement: If you used your KiwiSaver for a retirement fund, you are not able to collect the money until you get New Zealand Superannuation (NZ Super) which is only available after you reach the age of 65 years. The purpose of your KiwiSaver account being used for your retirement is so you can have a little bit more to live on each week. The NZ Super may not be enough to live on comfortably, so planning for your future with a retirement fund is something every New Zealander should do. Being unsure of how much money you may have to retire on, is why selecting the appropriate account type is so important. If you are planning on saving for a long time, then a growth fund would be recommended. Sorted has a couple of great tools (Sorted Fund Finder and Sorted KiwiSaver Calculator) that you can use to help work out what you may need to retire comfortably.
What is the Risk?
Now that you know your KiwiSaver account is a managed trust fund and not just a savings account, you might have clicked that there is, in fact, some risk involved as your money is being invested. Your savings are being invested in numerous businesses so if one was to go under, you would only experience a small loss and would be able to make up for it elsewhere in the other invested businesses. Additionally, the KiwiSaver providers have their actions monitored by independent experts and are regulated by the Financial Markets Authority. So you can assure your money is in good hands.
What are the Benefits?
So after all that you might be asking yourself, what are the actual benefits of investing in the KiwiSaver Scheme? To save you the time, we have composed a quick, simple list for you.
- You gain increased interest for your savings through a carefully constructed portfolio of investments.
- You get free money from the government (up to $521 p.a.) for your contributions.
- Your employer makes additional contributions for you as well (≥3% of your gross income).
- You can apply for a HomeStart grant when purchasing your first home.
- It is a fund you can use for retirement, ensuring you can live comfortably once you receive the NZ Super at 65 years.
- You have a choice of the risk you wish to take due to the different account types on offer.
- You don’t notice the money going in each week as the money is deducted before you receive your salary/wage. You aren’t affected by the contributions and can often get a pleasant surprise when you see that you have your futures secured.
If you would like more information regarding KiwiSaver or where to sign up, you can go online at www.kiwisaver.govt.nz.