Common KiwiSaver pitfalls

The complexity of KiwiSaver and its rules can easily trip people up, and there are currently few smart systems to alert those whose circumstances have changed that they need to rethink their KiwiSaver strategy.

‘‘It’s complex even for those in the industry for a long time,’’ says David Boyle of the Commission for Financial Capability.

Experts like Boyle see many instances of ignorance of the rules, or other very ordinary human failings leading to KiwiSaver pitfalls. Thinking KiwiSaver’s not for

you: The self-employed are particularly vulnerable to this thought. To get the full member tax credit (MTC) of $521.43, a person has to contribute $1042.86 each year. That’s earning an immediate 50 per cent return. Believing you’re too poor to join is also an issue. Some people genuinely are too poor to contribute the full 3 per cent, Boyle says. Others could be doing it, but are leaving wealth-enhancing MTCs going begging.

Assuming you understand: In one real-world example, a man complained to the Banking Ombudsman after joining KiwiSaver through his bank. He joined without reading the offer documents, and was horrified to find it wasn’t like a bank account, and any money he put in was locked away until he reached the age of 65.

Not reading statements: Another man who complained to the ombudsman was in KiwiSaver for four years before he realised he was in a low-return cash fund. He blamed the bank for returns he had missed out on. He’d filled in the application himself, and had been receiving statements for four years at the point he complained.

Taking long holidays: More than 130,000 people are on KiwiSaver contributions holiday, many for more than three years. They missed out on employer contributions,

MTCs and returns during a period when sharemarkets rose rapidly. This could leave many short of funds when they come to retire. Assuming you’re paying ‘‘market rate’’ for your fund: The

Financial Markets Authority believes there’s precious little price awareness among KiwiSavers, and has launched an online tool to get people thinking about whether they are paying too much, which will hurt their returns in the long-term.

Trying to time the market: It’s easy to think you’re smarter than everyone else, and know when it’s the right time to buy and sell shares. It’s tripped up many an investor. Buying and selling at the wrong times cost investors dearly. Assuming you are doing enough: Like paying the minimum off your mortgage, doing the bare minimum through KiwiSaver is unlikely to be enough. Most people will need other savings to achieve a prosperous retirement.

Oversaving into KiwiSaver:

Saving the minimum needed to get the maximum benefits is important, but putting in a penny more can be a mistake. KiwiSaver money is locked in until you are aged 65. Any extra savings, which might be needed for other purposes earlier – including possibly starting a business – should be saved outside of KiwiSaver.

Withdrawing it at 65: Many people take their KiwiSaver money out at age 65 and simply stick it in the bank on term deposit, says Boyle. That’s a mistake. Those who took all the money out and just jammed it into a bank account might not need that money for another 10-15 years. They are denying themselves the chance of getting some growth.

KiwiSaver is ‘‘set and forget’’:

This is no excuse for having a rethink each year. Lives change, and that can mean your savings strategy is no longer fit for purpose.