Ki­wisaver threat In­sur­ing your nest-egg,

Sunday Star-Times - - BUSINESS -

Mil­lions of dol­lars of re­tire­ment nest-eggs are be­ing lost to per­sonal fi­nan­cial crises, Rob Stock writes.

Ki­wiSaver has over­taken cars as most peo­ple’s sec­ond most valu­able as­set with av­er­age bal­ances now top­ping $15,000.

Strip out the 42 per cent of Ki­wiSavers who aren’t reg­u­larly sav­ing, and the av­er­age bal­ance for long-sav­ing wage-earn­ers would be much higher.

Yet the 2017 Ki­wiSaver re­port from the Fi­nan­cial Mar­kets Au­thor­ity shows nest-eggs be­ing lost be­cause peo­ple aren’t in­sur­ing their Ki­wiSaver like they in­sure their cars.

In the 12 months to the end of March, $81 mil­lion was paid out of Ki­wiSaver in cases of fi­nan­cial hard­ship, with 13,790 peo­ple draw­ing out an av­er­age of $5786 to help pay the bills.

An­other $32m was with­drawn and paid to Ki­wiSavers suf­fer­ing from se­ri­ous ill­ness, and $43m was paid out when the saver died, with the money go­ing to their es­tate.

Each with­drawal tells the tale of a life fallen into fi­nan­cial dif­fi­culty, and of Ki­wiSaver act­ing as a kind of in­sur­ance, but in the cases of fi­nan­cial hard­ship, and many of the cases of ill­nesses, they are also tales of re­tire­ment sav­ings stripped bare.

KI­WISAVER V CARS

Fi­nan­cial ad­viser Rob­bie Craw­ford from Life­time in Ti­maru be­lieves many peo­ple haven’t cot­toned on to in­sur­ing their nest-eggs like they in­sure their cars.

The av­er­age age of the car fleet is 14 years, with only a quar­ter aged eight years or less.

A rough es­ti­mate for the av­er­age price of cars in the coun­try is a lit­tle over $8000, and the me­dian around $5000, far short of the av­er­age Ki­wiSaver bal­ance.

‘‘We man­age a lot of Ki­wiSavers, and we see the bal­ances are get­ting quite con­sid­er­able. In many cases, it’s peo­ple’s sec­ond big­gest as­set,’’ he says.

But while a car is easy to in­sure, de­pend­ing on your age and driv­ing his­tory, pro­tect­ing your amassed su­per nest-egg is harder.

‘‘Peo­ple ask how much in­sur­ance should I have, but there is no right an­swer,’’ he says.

Ev­ery­one’s cir­cum­stances, in­clud­ing their cur­rent mort­gage and the num­ber of peo­ple who de­pend on them, are dif­fer­ent.

But there are things peo­ple can do to re­duce their out­go­ings that would make it eas­ier to get by, should ill­ness, ac­ci­dent or a job loss see their earn­ings fall.

Th­ese in­clude avoid­ing un­nec­es­sary per­sonal debt, re­duc­ing the mort­gage as fast as pos­si­ble, and keep­ing per­sonal spend­ing low.

COV­ER­ING UP

Ki­wiSavers can also pro­tect their nest-eggs with in­sur­ance, though ev­ery dol­lar spent on in­sur­ance is a dol­lar that can’t be paid off the mort­gage, or in­vested in a scheme like Ki­wiSaver.

The typ­i­cal mix of in­sur­ances that ad­vis­ers like Craw­ford use are life, trauma, and tem­po­rary dis­abil­ity cover, as well as health in­sur­ance and in­come pro­tec­tion.

Of those, only in­come pro­tec­tion pro­vides an on­go­ing in­come stream that can be used to con­tinue Ki­wiSaver con­tri­bu­tions un­til the pol­i­cy­holder is able to re­turn to work.

Life in­sur­ance can be the dif­fer­ence be­tween a sur­viv­ing spouse be­ing able to leave their Ki­wiSaver un­touched and carry on sav­ing.

There are 2.7 mil­lion Ki­wiSavers, mean­ing the vast ma­jor­ity of fam­i­lies have ac­counts in schemes.

But AMP’s Ben Mabon says: ‘‘Re­search shows that at least 1000 fam­i­lies a week are ex­tremely vul­ner­a­ble to ad­verse events re­lat­ing to death, dis­abil­ity or ill­ness be­cause they are un­der­in­sured.’’

That’s a lot of Ki­wiSaver ac­counts at risk, but Ki­wiSaver broke the tra­di­tional link be­tween work­place pen­sions and in­sur­ance.

KI­WISAVER IN­SUR­ANCE

Ki­wiSaver was de­signed to get all work­ers sav­ing for their re­tire­ments, but it ended up dis­plac­ing a great many group and com­pany pen­sions schemes that of­ten of­fered mem­bers in­sur­ance as part of their pack­age of ben­e­fits.

AMP at­tempted to re-es­tab­lish that link last year, and is about to have an­other go.

Last year AMP ex­per­i­mented by of­fer­ing a pack­age of life, in­come pro­tec­tion and trauma in­sur­ance to its 240,000 Ki­wisavers for a lim­ited time last year.

It called it Essentials, and the base cost was $11 a month for peo­ple aged 18 to 30 which of­fered $100,000 of life cover, and $10,000 of trauma cover, paid out if the pol­i­cy­holder was di­ag­nosed with one of a num­ber of spe­cific ail­ments like a se­ri­ous heart at­tack.

It also of­fered $2000 a month tem­po­rary dis­able­ment cover.

Essentials was a one-size fits all pack­age de­signed to give peo­ple a base level of cover so they wouldn’t have to raid their Ki­wiSaver nest-eggs should they suf­fer a health cri­sis.

‘‘We were try­ing to ad­dress the fact many peo­ple don’t have any cover in place,’’ Mabon says.

‘‘It was a bit of a test and learn for us. It was a unique pack­age.

‘‘It was low-cost – prob­a­bly the most af­ford­able life in­sur­ance of­fer in the mar­ket – and it was a di­rect prod­uct, sim­ply pur­chased on­line.’’.

Cus­tomers needed to an­swer only two med­i­cal ques­tions: ‘‘Have you re­ceived med­i­cal ad­vice that you have an ill­ness that could re­sult in your death within 12 months of mak­ing this ap­pli­ca­tion?’’, and ‘‘Have you re­ceived in the last 12 months treat­ment from a med­i­cal spe­cial­ist?’’

While Essentials was dis­con­tin­ued, AMP is close to un­veil­ing Essentials 2.0.

‘‘We’ve been fig­ur­ing out how to make it avail­able to more cus­tomers,’’ Mabon says.

HOME CHOICES

Hous­ing choices could end up hav­ing a big im­pact on the pro­por­tion of a per­son’s Ki­wiSaver bal­ance that is avail­able for re­tire­ment spend­ing.

AMP’s Blair Ver­non sus­pects many peo­ple are over-bor­row­ing to buy homes.

‘‘The data does not sug­gest peo­ple only take out the ab­so­lute min­i­mum.

‘‘The first ques­tion they ask on the phone is ‘What’s the max­i­mum I can take out’?’’

But, he says: ‘‘When we looked, we found the peo­ple do­ing a with­drawal for first home de­posits, we see a large pro­por­tion of them restart­ing con­tri­bu­tions af­ter.’’

Tak­ing on large mort­gages can be a risky propo­si­tion. It ex­poses bor­rowrs to higher risk of mort­gage de­fault, but can also mean they have lit­tle chance to save and in­vest in other as­sets.

It’s not known what pro­por­tion of hard­ship with­drawals from Ki­wiSaver are by peo­ple with mort­gages.

Two years ago BNZ fore­cast that based on cur­rent pay­ment tra­jec­to­ries, a third of peo­ple with mort­gages wouldn’t have paid them off by age 65.

They could be trapped into us­ing their Ki­wiSaver nest eggs to pay off their loans, leav­ing them with lit­tle to sup­ple­ment NZ Su­per, un­less they down­size or move some­where cheaper.

123RF

Shattered dreams: Ki­wiSaver ac­counts are be­ing emp­tied of record amounts when fam­i­lies hit per­sonal fi­nan­cial crises.

SUP­PLIED

Rob­bie Craw­ford, fi­nan­cial ad­viser from Life­time in Ti­maru.

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