Young son has time on his side
QMy partner and I have a 1-year-old baby boy. We want to give him opportunities we missed out on growing up, and we think that KiwiSaver will help. How much should we contribute into his KiwiSaver and will he get $521 from the government each year? We are wondering if we should set up a bank savings account for him as well.
AIt is a very good idea to set up both a KiwiSaver account for your son and a bank savings account if you can afford it. KiwiSaver gives investors low cost and easy access to international and domestic investment markets. The downside is that it is a long-term investment and can generally be accessed only for a First Home and retirement — it can’t be used for tertiary education or training. For this reason, a second accessible savings account is very useful — either through your bank or a fund manager. Most KiwiSaver providers have other more accessible investment options for savers. A bank savings account may be easier to set up — as the balance grows, you can look at other options.
As your son is just 1 year old, time is on his side. The power of compounding interest can go to work over the next 17+ years until he is old enough to start contributing himself. If you contribute just $10 per month to his KiwiSaver he could have $3000 (at 5 per cent per annum) when he turns 18. If his KiwiSaver averages 8 per cent per annum he will have around $4000 at age 18. If you increase your contributions to $20 per month you will get double the savings.
Your son won’t be eligible for the $521 government top up until he turns 18. In that year it is pro rata from his 18th birthday. A history of contributions may help towards eligibility for the First Home grant. We don’t know if these benefits will still be available in 17 years’ time, but that shouldn’t deter you from enrolling him.
Watch out for KiwiSaver administration fees. Many providers charge an administration or member fee of around $3 per month ($36 per year). If you are contributing say $10 per month to your son’s account, it doesn’t make sense to be losing $3 in fees. Some providers waive the fee for anyone whose balance is less than $500, for children who are contributing a certain amount or indeed for anyone under 18. To find those providers, contact the team at Sorted or get advice from a financial adviser. Also check whether your chosen provider has a minimum amount for regular savings. Some have a $20 minimum.
Opening a KiwiSaver account for a child under 16 requires both parents’ signatures, ID and evidence of address. Your son will need an IRD number and you will need to provide his birth certificate.
Enrolling him now and contributing yourselves is a great way to educate your child about the benefits of saving. As he gets older you can have conversations about money management, budgeting, and compounding interest — using his growing KiwiSaver balance as an example. By taking the time and effort to do this, you are demonstrating that you believe this is important. This is a good way to share your values with him and your wider family members.
Shelley Hanna is a Financial Adviser with Peak Portfolio Management Ltd which holds a licence FSP702451 issued by the Financial Markets Authority to provide financial advice services. Disclosure information at www.peak.net.nz or call 06 8703838. The information provided in this article is of a general nature and should not be relied on as a recommendation to invest in a financial product. Send your KiwiSaver questions to shelley. hanna@peak.net.nz