When the KiwiSaver scheme was first established by the government in 2007, any permanent resident of New Zealand under the age of 65 who didn’t enrol for it simply didn’t understand it.
The Government (which of course means “other taxpayers”) gave you a tax-free lump sum of $1,000 simply for signing up. If you contributed any amount up to $1,042.86 a year, the Government would again match it with an equal contribution. And if you were in paid employment, your employer was required to match your own contributions up to a specified proportion of your salary. Certainly, your contributions were locked in until you turned 65, but could be withdrawn to buy a first home or in cases of serious financial need.
Not surprisingly, the number of those who signed up for this bonanza soared way beyond what the officials who designed the detail of the scheme had expected. Many thousands of people enrolled their children and grandchildren even though those enrollees were not likely to be contributing in their own name for many years, if ever, for the sake of picking up the initial tax-free $1,000. And why would they not do so?
In the past few years, the government has wised up to the extent to which KiwiSaver was being abused: the maximum annual contribution from the government was reduced to $521.43 from July 2011 and the initial tax-free lump sum paid for signing up (the so-called “kick-start payment”) was scrapped altogether in May 2015. Not surprisingly, the number of new enrollees has fallen off sharply.
But it still makes sense to contribute to a KiwiSaver scheme up to the point where the matching contributions from your employer and the Government are maximised. Even after taking into account the fees paid to the companies which manage KiwiSaver funds, there is no other way to save that I know of where the subsidised returns are so high and where the risk is so relatively contained.
Beyond that point, however, contributing to a KiwiSaver scheme probably doesn’t make sense for most adults – at least those who have not yet paid off their home mortgage. If your home mortgage is costing you, say, 6% (and yes, I know there are some mortgages available at rates below that for the moment), paying off your mortgage is equivalent to investing your savings at a 6% rate of return, with absolutely no risk at all.
Some KiwiSaver schemes have in recent times achieved annual rates of return above 6% of course, but very few funds managers anywhere can consistently achieve a 6% after-tax, after-fees, return year after year, and none that I know of can do that with absolutely no risk. Indeed, if in the current environment you find a manager claiming to achieve that kind of annual return consistently, with absolutely no risk, you should report him to the Financial Markets Authority!
By Don Brash