KiwiSaver

Financial advisers will have a bigger role to play in the distribution of KiwiSaver now the Government has dropped the $1000 kickstart incentive, a banking expert says.

It was revealed in the Budget last week that the $1000 will no longer be available to new KiwiSavers.

The payment has been in place since the scheme started in 2007 but was dropped in the Budget this year, effective immediately.

It has cost the Government $2.5 billion in the eight years the scheme has been running.

Massey University banking expert Claire Matthews said the move would initially put some people off signing up.

But she said that made the role of advisers all the more important. “Financial advisers have a really important role to point out that it’s only $1000 and in a 30- or 40-year scheme $1000 is neither here nor there. In a year or two you’ll have $1000 through the member tax credit. It’s a nice to have but I don’t think it’s that important.”

Mercer New Zealand managing director Martin Lewington said the $1000 would have been enough of an incentive to convince some people if they were undecided about signing up.

“If I’m trying to reflect back to when I was 18, it would have made me go into KiwiSaver… $1000 free money , I’m sure I’d have tipped over rather than say ‘leave it there and I’ll do something else with my disposable income’.”

But he said the move would make it easier for the Government to bring in auto-enrolment. “If they do an auto-enrolment sweep, it’ll cost them $1000 per KiwiSaver less.”

Lewington said he would have preferred that the kickstart had not been dropped but now that it is gone, the Government should avoid making further changes to the scheme. “Once you start tinkering with something you lose trust. If they threw it back in there it’s tinkering again and it sends mixed signals.”

Adviser Allan Rickerby said the removal of the kickstart had been expected and would not be an issue once the scheme was made compulsory, which he expected to happen before long.

People enrolling in KiwiSaver from now will no longer receive a $1,000 kick-start payment, Finance Minister Bill English says.

“KiwiSaver has been successful in attracting members, with 2.5 million New Zealanders having a KiwiSaver account and together receiving $2.5 billion in kick-start payments since the scheme started in 2007,” English says.

“However, it also has considerable costs for taxpayers. The Government will spend more than $850 million this year on two subsidies – the ongoing government subsidy of up to $521 a year per member and the $1,000 kick-start.

“Because of these costs, the Government has decided to remove the $1,000 kick-start payment from today.”

Contributing KiwiSaver members aged 18 or over or under 65 will continue to receive an annual Member Tax Credit from the Government of up to $521.

Employers in general are still required to contribute at least 3% of an employee’s gross wage or salary and employees will continue to make their own contributions.

“Removing the kick-start payment for future enrolments will save over $500 million over the next four years,” English says. “This money is being reinvested in this Budget into priority public services.”
In 2015/16, the Government is forecast to spend $705 million on the KiwiSaver Member Tax Credit plus $12.3 billion on New Zealand Superannuation.

“Auto-enrolment when starting a new job, the 3 per cent employer contribution and the member tax credit of up to $521 each year means people still have an incentive to sign-up to KiwiSaver and to keep saving for their retirement.

The change does not affect existing KiwiSaver members.

Kiwis who think their retirement savings are sorted because they have signed up to KiwiSaver may get a nasty shock when they reach 65.

David Boyle, group manager of investor education at the Commission for Financial Capability, said one of his biggest concerns about KiwiSaver was that savers would think that, having signed up, they did not need to do any more.

“People join and in a lot of cases they’ve ticked the box and think ‘I’ve done that, I should be set’. But they haven’t worked out what that might mean when they get to retire,” he said.

He said just contributing the 3% of income minimum, matched by the employer contribution, would not be enough to give most investors are comfortable retirement.  “Three per cent [of your income] is not going to get you there, even if you start really early, it’s not enough. That is a real problem.”

ANZ research has shown that 79% of savers want more than the $370 per week a single person can get from the pension in retirement.

Of those who want extra income, 40% want more than $300 extra every week, and 31% want more than $500 each week on top of super. To get that for 20 years, they would  need a lump sum of $700,000 or $900,000, respectively.

That is well out of the reach of someone on the average wage unless they top up their KiwiSaver accounts significantly.

Someone who joined KiwiSaver at 25 with a salary of $50,000 would need to contribute about $6600 each year on top of the 3% from their income and 3% from their employer to reach that $700,000 target at 65.

That assumes they are in a fund that adapts their risk profile according to their age.

Almost an extra $10,000 a year would have to be contributed to reach $900,000.

Boyle said the Commission for Financial Capability was asking KiwiSaver providers to regularly tell members not only what their balances were but what income that would deliver at 65.

He recommended savers seek advice to set them up with a plan.

ANZ general manger of wealth products and marketing Ana-Marie Lockyer said how much money a person could be content with in retirement would depend on the kind of lifestyle they expect.

“If you’re happy to reduce your living expenses and the lifestyle you’ve become accustomed to, you’ll need less. Is it important to leave an inheritance to your family or are you happy to gradually dispose of your assets through your lifetime?”

She said it was important that people did not wait until they were close to retirement to work out whether they would have enough.  Savers should check in at least annually to make sure their savings were on track.

IRD is in talks with its counterpart in Britain after moves that have meant New Zealand KiwiSaver schemes can no longer accept British pension transfers without penalty.

A Qualifying Recognised Overseas Pension Scheme (QROPS) is a scheme that meets requirements set out by Britain’s HM Revenue and Customs (HMRC).

British migrants can transfer their UK pension benefits to the schemes without having to pay an unauthorised payment charge of 55% on the transfer.

Many make the transfer seeking simplicity, wanting to consolidate their retirement savings in one place when they migrate.

A number of KiwiSaver schemes have been operating within the regime but HMRC has sent a letter to schemes on both sides of the Tasman, asking them to confirm that policy-holders can only access their benefits before the age of 55 in the same circumstances as UK pension-holders in Britain can.

The only circumstance that is allowed is ill health.

But in New Zealand, KiwiSaver schemes provide for access to funds in the case of severe hardship, or for withdrawal for a first home.

That means KiwiSaver providers with QROPS status cannot accept UK pension transfers.

The letter was backdated to April 6.

Emma Dale, of law firm Chapman Tripp, said KiwiSaver scheme did not comply with the new rules and would not unless New Zealand or Britain changed their rules.

She said a British move was possible because the KiwiSaver effect seemed to be an unintended consequence. “They were quite happy with these providers until now.”

But she said if it did not, New Zealand could be compelled to change the law to ringfence money that was transferred from Britain.

New Zealand could do that by ringfencing the money transferred from Britain, she said.

“The  QROPS industry in New Zealand is relatively large. If the minister sees the need for a change it is possible.”

People who had already transferred their money into a KiwiSaver schemes should be unaffected, she said.