KiwiSaver

KiwiSaver could be part of the solution to provide financial advice to older New Zealanders who do not have large amounts of money to invest, adviser Martin Hawes says.

Hawes is also chair of the investment committee of the Forsyth Barr KiwiSaver scheme, Summer, and is on the board of variable annuity provider Lifetime.

He said it was hard for people “in the middle”, who might have $100,000 to $200,000 saved, to get personalised advice.

Many financial advisers found it hard to achieve diversification with smaller sums and those people tended to default to invest in term deposits that proved insufficient.

Suggesting that people read up on the principles of investment was no substitute, he said, because while it was possible to master the concepts most people found it much more difficult to apply it to their own situations.

But he said, now that the law is being changed to allow people over 65 to join KiwiSaver and move between funds, it could provide an option.

He said it would be a “readymade, attractively priced” fund for retirees that would be perfectly liquid because they could draw on their money whenever they needed to.

Many providers allow for a set amount of withdrawal on a regular basis.

“I think that’s going to work really well for people,” Hawes said.

He said it would be particularly efficient for KiwiSaver schemes that had financial advisers working alongside.

“KiwiSaver may be a pretty good solution for these people.”

Hawes said there was a huge need for financial advisers. Many Baby Boomers were finding, now matter how hard they found it to grow their wealth in the first place, using that wealth to generate a stream of sustainable income was the hardest thing they had encountered in the financial world.

Hawes said it was likely that the new advice environment would mean the end of “one-man band” advice firms. But he said that would not be an issue so long as independent advisers were able to band together in small groups to continue to offer a service.

“We are thrilled that from next year all KiwiSaver providers will be required to join NZ Funds in projecting member balances at retirement”, says Geoff Motion. NZ Funds first included retirement savings projections in 2018.

“When we entered the KiwiSaver market in 2011, we drew on our then twenty-year heritage of managing New Zealanders wealth to shape the service we offered. We initially called it a service, because we have learned the hard way that sharp products rarely deliver clients what they hope”, says Motion.

Motion points to the fact that NZ Funds KiwiSaver Scheme member balances are now 1.5x the national average.* “To the best of our ability, as it’s a difficult thing to attribute properly, we do not think this isbecause our clients are wealthier. Neither is it due to returns, while clients have earned above average returns after fees by our assessment, that has made very little difference.

The biggest factor says Motion is that as 96% of NZ Funds KiwiSaver Scheme members are working with a financial adviser, they have been encouraged to save at higher than minimal rates and feel connected to their KiwiSaver.

The concept of projecting retirement savings several years ago is a dumbed down version of what every client who joins the NZ Funds KiwiSaver Scheme receives in financial planning technology. “Interestingly, when we first provided statements with retirement savings projections to members it was well received, as it reminded them why they should continue contributing, and in fact consider raising their contribution rates, so we think the new regulations will be good for everyone in the industry”.

NZ Funds has, what it believes is market-leading technology here, enabling its members to increase their contribution rates in a paperless, purely digital, way.

 

* NZ Funds KiwiSaver Scheme average member balance $29,791 KiwiSaver industry average member balance $19,246. Source: Workplace Savings New Zealand 31 March 2019.

Inland Revenue needs to acknowledge that over-charging KiwiSaver members tax is a bigger problem than some not paying enough, one adviser says.

It was revealed this week that IRD had determined 450,000 people were paying the wrong rate of tax on their KiwiSaver accounts and other managed funds.

It had written to at least 120,000 taxpayers, some of whom said they were being given bills of hundreds of dollars a year.

It said it would not pursue people for underpayment in previous years, not refund overpayment.

Its new computer systems meant it could more easily see what tax rate should be applied to PIE investments.

KiwiSaver tax is an issue that has been highlighted by AFA John Cliffe, who headed a group that wrote an open letter last year outlining major problems with the retirement savings scheme.

One issue highlighted by the letter was the fact that people who enter a default KiwiSaver scheme are assigned a tax rate of 28%, even though they might be meant to pay only 10.5% or 17.5%, depending on their income in the prior year.

The letter noted that while the IRD supplied default KiwiSaver funds with default members' account details, it did not give them the tax rate. Unless a fund was able to confirm it direct with the member, they were stuck on the maximum rate.

Cliffe said the IRD should be compelled to give tax rate information to KiwiSaver providers for all members.

He said the reason the IRD was backing away from seeking underpaid tax in previous years was probably because overpayment was more of an issue.

The IRD has been approached for comment on this point.

Cliffe's colleague, Rachelle Bland, has launched a petition "to fix KiwiSaver tax".

She said the major drawback with default enrolment was that there was nowhere on the form for an employee to enter their ta rate.

"Rather they get taxed at the highest rate of 28% until they advise their KiwiSaver provider otherwise. This can only happen after the end of the three month opt in period. To make matters worse, there is no way for overpaid tax to be refunded as KiwiSaver tax is a final tax."

She said it had been an issue since 2007 and the youngest, least financially aware members were the most affected.

KiwiSaver members will now see their projected savings for retirement and the likely weekly income it will provide on their annual statements, Commerce and Consumer Affairs Minister Kris Faafoi says.

“By making this information easily available New Zealanders will be able to see whether they are on track for the kind of retirement they want or whether they need to make changes to their savings.

“They will also receive information about the steps they can take to increase their savings – because we want people to have the best retirement possible.”

KiwiSavers providers will use a standard formula and assumptions for calculating projected retirement savings, to ensure all providers take the same approach.

“We want people to enjoy the full benefits of KiwiSaver, and for this to happen they need good information,” Faafoi said.

“By requiring KiwiSaver providers to calculate projected retirement savings in a consistent way, people will have a more meaningful view of their finances and will be able to make any necessary adjustments.”

Faafoi said the Government had been working to improve the information provided in annual statements, including a new requirement to disclose the total amount in fees that people have been charged through the year.